Shares in Britain’s banks fell by as much as 5% today amid increasing fears that the eurozone debt crisis could spread to Italy or even Spain.
The two countries – the third and fourth largest economies in the eurozone - are widely seen as too big to bail out if they are unable to keep up with their debt payments, as some market commentators suggest.
Speculation that either could default caused jittery investors to ditch shares today, building on the losses of recent days when markets fell amid fears about the strength of the economies of China and the United States.
Bank shares were among the worst hit, with Barclays, which is believed to have a big exposure to both Italy and the Iberian peninsula, at one stage down nearly 5%. Taxpayer-backed Lloyds was down 3% and Royal Bank of Scotland off 1%.
The FTSE 100 Index fell 100 points, or 1.7%, today with banks among the biggest fallers. The blue-chip index has now fallen 4% in under a week.
The ISEQ index was down 1.73% or 50 points at 10.25am.
Meanwhile, the Dax in Germany and the CAC 40 in France fell more than 2%. Overnight the Hang Seng in Hong Kong fell more than 3%.
Financial markets have been on the back foot in recent weeks over fears that Greece would default on its debts.
The London market showed signs of recovery earlier this month after Greece passed a raft of tough austerity measures, raising hopes it would avoid a default.
But the latest concerns about the strength of the Italian banking sector have depressed the market again.
Investors fear that the results of new stress tests which will be unveiled on Friday could reveal a weakness in the country’s financial sector.
They are currently demanding a higher rate to lend money to Italy – through higher bond yields – because they see lending to the country as increasingly risky.
Andrew Morris, managing director of investment management firm Signature, said: “We are experiencing a seemingly relentless rise in the EU government bond yields of Greece, Portugal, Spain and Ireland.
“Are we to be joined by Italy, a country which, whilst being frequently mocked for the state of its public finances, had until recently escaped the attention of the bond markets? The omens aren’t good.”