European stock markets fell sharply Tuesday and the euro continued to lose ground, hit by concerns about the banking industry following the weekend rescue of Spanish regional savings bank CajaSur and worries about the growing tensions between North and South Korea.
The pan-European Stoxx 600 Index lost 2.2%. London's FTSE 100 dropped 2.7%, while Frankfurt's DAX fell 2.5% and the CAC-40 in Paris sank 3%. Madrid's IBEX-35 declined 3%.
Dealers said much of the markets' focus was on Spain, as a plan to consolidate the Spanish savings-bank sector has been submitted to the Spanish government by five institutions which could together form Spain's fifth-largest financial institution.
The move may contribute to supporting the banking sector in the medium term, but in the short term it keeps the focus on financial frugalities, said Crédit Agricole Corporate & Investment Bank.
Adding to the downbeat tone, Larry Summers, the director of the U.S. Council of Economic Advisers, and one of the U.S. president's closest economic advisers, said the sovereign-debt crisis in southern Europe could lead to "increased budget deficits" and "dire consequences for financial markets."
Renewed worries over the euro-zone financial system following the CajaSur rescue have kept pressure on the euro. The euro was recently trading at $1.2270, down from $1.2372 in New York late Monday. The dollar stood at ¥89.65, down from ¥90.29.
"Market participants are focused now on whether Europe's recent credit uncertainty may eventually weigh on" the economies of other major industrial countries, such as the U.S., said Tokyo-based Gaitame.com chief analyst Daisaku Ueno.
Political tensions on the Korean peninsula have also worsened market sentiment. "We believe that arbitration talks by U.S.-China are already happening below the radar. However, the world will need to see strong evidence that the situation [on the Korean peninsula] can be brought under control," said Credit Agricole.
The political tensions helped send Asian stock markets sharply lower. Japan's Nikkei Stock Average was down 3.1%, while South Korea's Kospi Composite tumbled 2.8%. Hong Kong's Hang Seng Index shed 2.4% and the Shanghai Composite lost 2.2%.
On Wall Street Monday, stocks declined as the rescue of CajaSur reignited concerns about the euro-zone's financial system, while investors continued to fret over the potential impact of a regulatory overhaul in the U.S. The Dow Jones Industrial Average dropped 1.2% to 10,066.57, while the S&P 500 fell 1.3% to 1073.65 and the Nasdaq Composite closed off 0.7% to 2213.55.
In commodities, spot gold was at $1187.40 per troy ounce, down $4.45 from Monday's New York close. July Nymex crude oil futures were down $1.67 at $68.54 per barrel. In the European bond markets, the June bund contract was up 0.41 at 129.02 after hitting a new high at 129.17.
Looking ahead to Tuesday's economic data, the U.K.'s second release of first-quarter gross domestic product numbers could be the highlight, while in the U.S., the S&P/Case Shiller house-price index and consumer confidence figures will be in focus.