Growing political uncertainty in Spain and Italy sent stock markets tumbling on Monday as investors became increasingly concerned that a new round of instability could undermine efforts to end the eurozone crisis.
Spanish prime minister Mariano Rajoy was forced to deny involvement in a corruption scandal which has led to calls for his resignation, while in Italy new polls showed Silvio Berlusconi gaining ground before elections this month. Investors fear the former Italian prime minister's promise to repeal an unpopular property tax could increase his support, leading to a hung parliament and a move away from the reforms implemented by the regime run by technocrat Mario Monti.
The recent global market rally came to a sudden halt, with a sell-off across the board. In London the FTSE 100 finished down 100.40 points at 6246.84, its biggest one-day points fall since July 2012, with £25bn wiped off the value of Britain's top companies.
Spain's Ibex ended 3.77% lower at 7919.6, while Italy's FTSE MIB fell 4.5% to 16,539. Germany's Dax dropped 2.49% to 7638.23, and France's Cac closed 3% lower at 3659.91.
In the US, the Dow Jones Industrial Average also came under pressure, losing 140 points, almost 1%, in early trading.
In the bond markets, Spanish yields rose 23 basis points and Italian ones climbed 15 basis points as investors reduced their exposure to both countries. But at 5.45% and 4.48% respectively, the yields were still well below the 7% widely seen as the danger level.
The euro lost over 0.5% against the dollar, falling to $1.3554. The single currency fell nearly 1% against the pound to 85.9p after hitting a 15-month high last week.
Michael Hewson, senior market analyst at CMC Markets, said: "Investors are once again being spooked by political uncertainty from both Spain and Italy as both countries deal with local political difficulties that could derail ongoing and future reform programmes.
"While markets appear able to shrug off bad economic data, it is politics once again that has markets worried."
Joe Rundle, head of trading at ETX Capital, said: "Attention now shifts to the European Central Bank meeting on Thursday for more clues on how the region's central bank perceives the latest developments in Spain."
Spain's People's party (PP) said on Monday it would take unspecified legal action to draw the sting from the corruption scandal, which overshadowed a summit between Rajoy and German leader Angela Merkel to discuss Spain's struggling public finances.
To compound the misery of a country in its fifth year of crisis, Spanish jobless claims figures released on Monday rose to a record in a country where almost half of young people are on the dole. Protesters have been rallying since documents were published on Thursday which purported to show Rajoy and other senior PP officials received money that had been hidden from tax authorities for years .
"The things attributed to me are false. I have said that and reiterate it today," Rajoy said in Berlin, adding he was determined to continue to tackle a slump which began in 2008 when a property boom bust, and still threatens Spain with a European bailout. After Rajoy spoke, Merkel said: "We have a relation of full trust in the Spanish government."
As Rajoy set off for Berlin, his third-in-charge at the PP, Carlos Floriano, told a news conference in Madrid that the conservative party would sue "all those who may have attributed, leaked and published" documents allegedly drawn up by two former party treasurers and published in Spain's top-selling non-sports daily, El País.
The official figures showed a record 4.98 million Spaniards were registered as unemployed in January, a jump of 132,000 since December as many workers were laid off after the festive season.
