World stocks tumble

World stocks hit a one-week low on Thursday and German Bunds rose as Spain paid more than at any time since 1997 to sell 10-year debt, sparking fears it may join other euro zone peripheral states in being unable to finance itself.

The euro held close to a five-week trough, with concerns about the debt turmoil spreading to commercial banks across the Atlantic and a clash between Germany and France over the ECB's role in tackling the crisis also keeping investors jittery.



Spain sold 3.6 billion euros of a new 10-year benchmark bond at average yields of 6.975 per cent -- the highest since the days of the peseta and barely below the 7 per cent level widely viewed as unsustainable for public finances.

Spain's 10-year yield hit a euro era high above 6.78 per cent while the premium investors pay to hold the debt over German benchmarks rose to its highest in the euro's history.

A bond auction in Paris reflected growing concerns France is getting dragged deeper into crisis, with the AAA-rated country's borrowing costs over two and four years jumping by around half a per centage point.

"(The Spain sale) underscores what everyone has seen in the last couple of days," said Marc Ostwald, strategist at Monument Securities.

"The euro zone has got to deliver something which is going to calm markets down and at the moment markets feel like they are being given no comfort whatsoever and this is symptomatic of that."

Safe-haven Bund futures rose 53 ticks.

The MSCI world equity index extended losses after the Spanish auction to fall 0.6 per cent on the day.

CONTAGION FEARS

European stocks lost 1.3 per cent. The banking sector fell more than 2 per cent and emerging stocks dropped half a per cent. U.S. stock futures were down 0.1 per cent, pointing to a weaker open on Wall Street.

Wall Street fell on Wednesday after Fitch Ratings warned it may lower its stable rating outlook for U.S. banks with large capital markets businesses due to fallout from Europe.

Also on Wednesday, another rating agency, Moody's, downgraded 12 German public sector banks seen as less likely to receive federal government support, if needed.

The euro fell as low as $1.3421. The dollar rose 0.4 per cent against a basket of major currencies to 78.34.

"The only way to trade euro is to sell. It is headed lower and our year-end target of $1.30 looks to be tested soon," said Geoff Kendrick, currency analyst at Nomura.

Many now view an expanded role for the European Central bank as key to stopping a breakup of the single currency zone.

France, the region's second largest economy, called for more aggressive ECB bond purchases. But Germany remains firmly opposed to using the central bank as a lender of last resort, saying it is up to individual governments to put their fiscal houses in order.

"Everyone's looking around saying we should be doing something but no one is making any decisions. It can't carry on like this," said Justin Urquhart Stewart, director at Seven Investment Management.

"But how many weeks have we said that for? Germany needs to lead the way in a euro core, and then think about how we handle the periphery."

Brent crude oil fell 1.2 per cent to $110.56.