The euro slipped to near four-month lows and European shares extended their losing streak on Thursday, as investors avoided riskier assets due to the deepening turmoil in Greece and fears of contagion spreading to other stressed euro zone economies.
Worries about the health of Spain's banks also resurfaced after a report that customers at Bankia had withdrawn more than 1 billion euros from their accounts in the past week, though the Spanish government said there had been no exit of deposits from the lender.
The report followed suggestions that customers of Greek banks were moving funds in anticipation of its exit from the euro, adding to anxiety among investors about the lack of a firm plan to deal with the region's worsening crisis.
"It's not Greece leaving the euro that is the major issue, it's the domino effect," said John Bearman, chief investment officer at UK-based Thomas Miller Investment, which manages roughly 3 billion pounds worth of assets.
U.S. stock index futures were little changed following four days of losses on the S&P 500, with trading once more expected to be dictated by developments in Europe.
However, a surprisingly strong first-quarter performance by Japan, the world's third-largest economy, and the minutes from the last U.S. Federal Reserve's policymaking meeting showing it stood ready to do more to support the economy, soothed some of the negative sentiment outside Europe.
"In aggregate, global growth indicators have continued to improve and there have been some positive developments amid the gloom," Trevor Greetham, asset allocation director at Fidelity Worldwide Investment, said.
But the contagion fears in Europe and jitters over political turmoil in Athens, where politicians rejecting harsh austerity measures are likely to win June 17 elections, have kept riskier assets under pressure.
The euro was down around 0.1%, but holding just under the $1.27 level and not far from a four-month low of $1.2681 hit on Wednesday.
The single currency has already shed 3.9% in May, coming close to its 2012 trough of $1.2624 reached in mid-January.
A move by the European Central Bank to stop providing liquidity to some Greek banks, which are severely under-capitalised, only added to the pressure.
While a warning from the new French government that it will not ratify the European pact on fiscal discipline unless it is amended to include ambitious commitments to promote economic growth, underscored the spilt a the heart of Europe over how to deal with the debt crisis.
Spain in the frame
Adding to the spreading sense of crisis, Spain's medium-term borrowing costs rose sharply to around 5% in an auction of three- and four-year bonds, reflecting renewed concern over Spanish banks and the worsening outlook for its economy.
"The auction was well covered, however yields sky-rocketed ... How long Spain can continue to pay such high interest is yet to be seen," said Craig Erlam, market analyst at Alpari (UK).
Benchmark Spanish 10-year bond yields had risen past the key 6% mark at the start of the week as contagion fears spread from Greece, and moved up after the debt auction to be quoted around 6.39%.
Global shares, as measured by MSCI's world equity index, slipped 0.25% to 303.95 points a weakness in European markets more than offset a modest recovery in Asia, which had posted its biggest one-day drop in six months on Wednesday.
MSCI's emerging markets index also dipped 0.1%, with Europe's problems offsetting a 1.4% rise in China which makes up almost a fifth of the index.
The pan-European FTSE 300 index was down 1.25% at 980.25 points by mid session and back to levels last seen in December 2011.
Spain's benchmark IBEX index fell 2.4% to its lowest level since mid-2003, as shares in Bankia slumped after the report of deposit outflows.
A rebound in the dollar as investors sought safety from the turmoil in Europe was putting commodities under pressure, but the steadier tone in the euro on Thursday helped a small recovery.
Gold rose about 1% to $1,547.86 an ounce as bargain-hunting emerged after prices tumbled to a 4-1/2 month low in the previous session.
Brent crude however slipped to a near four-month low under $110, edging down 4 cents to $109.71 a barrel, while U.S. crude was up 26 cents to $93.07.