EUROPEAN markets were yesterday left quaking after Standard & Poor’s downgraded Spain’s sovereign credit rating, the third debt-stricken eurozone nation to receive such treatment in just 48 hours.

Fears of contagion spreading to other European countries catapulted the EU into action, with one politician letting slip that a revised bailout package for Greece could be worth up to €120bn (£104bn).

Juergen Trittin, a member of the German green party, said International Monetary Fund managing director Dominique Strauss-Kahn had approved the deal to run over three years in principle, with Greece being removed “de facto” from the financial markets for the duration of the bailout.

As analysts warned of a financial crisis on the scale of the panic prompted by the collapse of Lehman Brothers in 2008, German chancellor Angela Merkel promised swift action to maintain the stability of the eurozone.

But she also said that it was a mistake for Greece to have been allowed to enter the single currency in 2000.

“It turned out that the decision [in favour] may not have been scrutinised closely enough,” she said.

The leaders of the 16 eurozone countries will now meet at an extraordinary summit on 11 May to finalise the terms of the Greek bailout package.

The S&P’s decision to push Spain’s rating down a notch to “AA” came just a day after Portugal was downgraded to “A–” and Greek government bonds to “junk” status on Tuesday.

“Challenging economic conditions will further pressure Spain’s public finances, and additional measures are likely to be needed to underpin the government’s fiscal consolidation strategy and planned programme of structural reforms,” S&P analyst Marko Mrsnik said.

Talk of a more generous bailout for Greece eased pressures on the country’s debt yesterday, with yields on 10-year Greek bonds falling back 57 basis points to 9.97 per cent after hitting as much as 12.5 per cent in intra-day trading. But the yield on Portuguese and Spanish 10-year debt rose by 18 and 13 basis points respectively to 5.79 per cent and 4.16 per cent on fears of a domino-effect of sovereign debt emergencies in Southern Europe.

The head of the Organisation for Economic Co-operation and Development yesterday warned the crisis could spread “like the ebola virus.” “Contagion has already happened,” she said.

And analysts pounced on the potentially colossal ramifications for the world economy if Greece’s woes were to spread.

“If a larger economy such as Spain began to experience even a fraction of the stress besetting Greece, investors would be forced to countenance the possibility that the sovereign debt crisis might be morphing into a major macro economic event,” said Charles Stanley analyst Jeremy Batstone-Carr.

“The crisis in Greece could pose as big a risk to the global economy and financial markets as the collapse of Lehman Brothers,” added Julian Jessop at Capital Economics.