Growing worries about the euro zone's sovereign debt situation and anxiety ahead of a key US jobs report due today have seen the European single currency and shares hit a two-month low.
While Greece is already under pressure to get its public finances in order, Spain and Portugal have also come into focus, with the latter's credit default swap spreads hitting their widest level ever at 2.26 per cent. That marks a huge one-day leap from just 1.96 per cent.
This morning, the FTSEurofirst 300 index of top European shares fell one per cent to 982.81 points, after touching its lowest since December 2009 (977.02).
This week, the Portugese government was expected to sell 500 million euros of bonds at auction, but only 200 million were sold, while the Lisbon parliament was due to vote on a regional financing bill viewed by the markets as a crucial test of the government's ability to curb public spending.
According to the government, the opposition-led bill approved yesterday will hamper its ability to cut a budget deficit that's predicted to total 8.3 per cent of GDP in 2010.
On the back of concerns, US and Asian investors shed risky assets overnight and moved into US Treasuries and the Japanese yen.
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