Fears that the eurozone crisis is escalating and further evidence of the weakness in the US economy drove stock markets lower on Wednesday as policy makers failed to restore confidence in global markets.
The FTSE 100 index closed at its lowest level since November, after its biggest one day fall for nine months of 133 points. After a nerve-racking day Wall Street narrowly avoided its ninth consecutive day of falls – a losing streak unseen since 1978.
A much anticipated speech by Italy's prime minister, Silvio Berlusconi, was delayed until European markets closed but failed to calm the storm on international financial markets that threatens to engulf his country and imperil the entire eurozone.
Italy and Spain – whose prime minister, José Luis Rodríguez Zapatero has cut short his summer holiday – are now at the centre of the eurozone debt crisis that began with Greece more than a year ago and has enveloped Ireland and Portugal.
European commission president José Manuel Barroso tried to inject calm into the markets by insisting that record high yields – interest rates – on Spanish and Italian government bonds were "unwarranted". "Developments in the sovereign bond markets of Italy and Spain are a cause of deep concern," Barroso said.
"These developments are clearly unwarranted on the basis of economic and budgetary fundamentals in these two member states and the steps that they are taking to reinforce those fundamentals."
The Swiss central bank stunned markets by attempting to reverse the "massive overvaluation" of the Swiss franc, which hit record highs against the dollar as a perceived haven, by cutting interest rates.
Amid the anxieties in Europe, concerns about the US economy were compounded when the service sector survey was weaker than expected and other data showed a fall in factory orders in June. Investors bet on gold as a safe haven driving prices to a record $1,663.40 an ounce.
European politicians had hoped their deal on 21 July to bailout Greece for a second time and impose losses on bond holders would restore confidence in the eurozone. Their efforts have failed, particularly as US debt crisis compounded the febrile atmosphere in the markets.
In France, shares in the second largest bank Société Générale were temporarily suspended – they eventually closed 9% lower in heavy turnover – after it took a €395m (£345m) hit on its exposure to Greece because of its contribution to the bailout plan.
Concerns were also mounting that banks across the eurozone were finding difficulties in funding themselves on the markets. Huw van Steenis, banks analyst at Morgan Stanley, said: "Investors, we and some banks are increasingly concerned that funding markets won't reopen with sufficient depth or at good enough terms for Italian and Spanish issuers, requiring banks to take offsetting measures".
Berlusconi's statement to the lower house of parliament faced immediate criticism for failing to tackle the problems facing the Italian economy even though he promised to work with unions and employers on a reform of Italy's notoriously rigid employment laws. He drew attention to the fact that his government had earlier given the green light to €9bn of infrastructure projects which he said would promote growth, especially in the poorer south.
But his keenly awaited speech contained neither an appeal to the nation for painful sacrifices in the common interest, nor an announcement that his government would force through the radical, structural reforms that most economists believe Italy badly needs. There were few indications that Berlusconi intended stiffening the budget-reduction measures his government approved last month. And he flatly ruled out any change of government.
"Stability has always been a winning weapon against speculation," Berlusconi declared.
He was speaking at the end of a day that saw Italy's borrowing rates soar to their highest levels since the launch of the euro. The yield on its benchmark, 10-year treasury bonds touched 6.21% before dropping back to 6.09%. His economy minister Giulio Tremonti had earlier met eurogroup president Jean-Claude Juncker to discuss the crisis.
Berlusconi had originally intended to deliver the first of two speeches to the legislature earlier in the day. But it was decided that, given the sensitivity of the situation, he should hold off until after the close of markets in Europe.
Despite calls for his resignation, the prime minister said he fully intended seeing out his mandate, which does not expire until 2013. The nearest he came to self-criticism was an admission that "we know there is more to do."
Quite what remained elusive. His pledge on labour reform was tentative.
The government had some time ago proposed to the unions and employers a revision of Italy's keystone employment law, he said. "Now is the time to check the level of agreement".