The FTSE 100 fell in early trading today as yields on a Spanish bond auction soared to almost seven per cent - a level considered unsustainable by economists.
A warning from ratings agency Fitch that the outlook for US banks could deteriorate if the Eurozone sovereign debt crisis is not resolved also took its toll.
Spain issued 10-year bonds this morning and France sold five-year bonds with yields in the Spanish auction spiking at 6.975 per cent. The previous high for the country's 10-year bonds was 5.986 per cent in July.
Shares across Europe were hit, with the FTSEurofirst 300 index of top European shares down 0.2 per cent on opening.
Following the warning by Fitch Ratings that it may reduce its "stable" rating outlook for US banks, Morgan Stanley sank eight per cent, while Goldman Sachs shed 4.2 per cent.
Investors in the UK were also digesting the news that the Government had agreed to sell Northern Rock to Virgin Money for £747m.
On London's blue chip index the biggest faller was cruise ship company Carnival, down 2.7 per cent.
Hedge fund giant Man Group was off by two per cent - the biggest faller in the financial sector.
Engineer Weir Group and miner Xstrata dipped by around two per cent while British Land lost 1.8 per cent.
Among banks Lloyds and RBS dipped by 0.8 per cent, while Barclays lost 1.3 per cent.
On the up side commodities giant Glencore put on 1.4 per cent after issuing a statement which said its marketing unit was performing solidly despite tough markets.
National Grid and outsourcer Serco were both up 1.6 per cent after reporting strong results in market updates today. Serco said it was defying the economic headwinds which have led to austerity measures.
BSkyB was another company to nudge up, seeing a 0.4 per cent gain.
On the FTSE All-Share a number of prominent retailers updated the market, with Mothercare reporting a fall in half-year profits. The bleak statement triggered a 2.8 per cent fall in its shares.
But French Connection fared even worse, plunging by 23 per cent after issuing a warning that it was likely to miss full year forecasts.
Meanwhile official figures showed that retail sales unexpectedly lifted in October as retailers started discounting early for Christmas.
US data due for release later includes October housing start figures.