MADRID (AP) - Fear, that contagious emotion, spread from country to country in Europe on Thursday as panicky investors worried the euro currency union could be heading toward an ugly breakup.
Spain and even France, one of the continent's core economic engines, were forced to pay sharply higher interest rates to raise cash to fund government spending.
While the European Central Bank was suspected of intervening in bond markets to fight the rise in the borrowing rates, many analysts say it needs to act more aggressively to contain the crisis. But Germany, Europe's paymaster, once again blocked any such move on concerns it would let profligate governments off the hook.
Uncertainty is now even eroding the appeal of top AAA-rated government bonds from countries like France as investors prepare for worst-case scenarios like the deconstruction of the eurozone.
"Basically, if you look at any country that is not Germany, the contagion effect is major," said Oscar Moreno of Madrid brokerage house Renta4.
In Spain, an auction of 10-year government bonds left the country paying interest rates of nearly 7 percent. That's the highest rate since 1997 and a level economists see as unsustainable. Greece and Ireland received rescue loans from the European Union after their bond yields jumped above the same level.
Across the border, France had to pay 1.85 percent to sell two-year bonds, up from 1.31 percent at the last auction in October.
The dismal figures were the symptom of a broad retreat by investors this week from European stock and bond markets as they worry eurozone leaders are no closer to finding a lasting solution. Shares of European companies fell in all of the continent's exchanges, including so-called safe nations like Germany and the Netherlands.
In the U.S., stock indexes were down as the spiking bond yields in Spain overshadowed the latest signs of growth in the U.S. economy. The Dow Jones industrial average dropped 135 points, or 1 percent, to close at 11,771.
German Chancellor Angela Merkel added to the market carnage by shrugging aside hopes for a quick-fix solution to the crisis. She insisted that spreading debt liability with a massive European Central Bank bond-buying drive could ruin competitiveness and won't resolve Europe's problems.
The ECB already buys government bonds in relatively small quantities - $6 billion last week - to keep their yields down. A bond's yield is an indication of the rate the government would pay to raise money on markets.
Analysts said ECB bond purchases helped bring Italy's 10-year yield back below the 7 percent level on Thursday. But the program is far too small to make a lasting impact in bond markets.
The ECB's leaders say the bond purchases must remain limited and temporary to avoid giving governments the sense they can delay much-needed reforms to make their economies more competitive.
Another move experts say could provide a decisive solution to the crisis is the introduction of "eurobonds" issued jointly by financially strong countries and weaker ones.
But Merkel rejected that as well, for fear of exposing German taxpayers to huge costs. She insisted Thursday that Europe needs to consider growth-promoting measures that don't immediately cost money, such as labor-market reforms that could take months to enact.
The fear, however, is that during that time the financial jitters will spread and worsen, pulling the currency union apart.