Spain's debt yields have broken the six per cent level as investors worried about its budget, knocking the euro and sending safe-haven German bonds to a record last set at the height of the euro zone crisis.
Signs of slowing global growth also undermined sentiment in commodity markets while European equity markets were mostly in positive territory after sharp falls last week.
Spanish stocks were lower, however, reflecting concerns about the country's ability to finance its deficit and debt with borrowing costs on the rise.
"We're back in full crisis mode," Rabobank strategist Lyn Graham-Taylor said.
"It is looking more and more likely that Spain is going to have some form of a bailout."
Mixed signals from the European Central Bank (ECB) over its willingness to help the market by restarting a special bond buying programme and news Spanish banks have been heavy borrowers of cheap ECB funds also undermined confidence.
Spain's 10-year bonds were up 16 basis points at 6.15 per cent, five-year yields topped five per cent.
Six percent was last reached in December and is psychologically important for markets. The rise typically accelerates after that level, putting yields on course for seven per cent beyond which debt costs are seen as unsustainable.
The cost of insuring Spanish debt against default also hit record highs in early trading. Spain will auction 12- and 18-month Treasury bills and two-year and 10-year bonds on Thursday.
Contagion fears also pushed Italian 10-year bonds higher.
The euro fell below a key level at $1.30 on the concerns about Spain to hit $1.2995, its lowest in two months, before recovering to be down 0.4 percent at $1.3010.
German bond prices gained and yields on the benchmark 10-year Bund, viewed as the euro zone's safest debt, hit a record low of 1.628 per cent.
The previous record was set in November last year at the height of the debt crisis, just before the ECB injected around 1 trillion euros of cheap three-year funds into the region's banking system.
City A.M. Reporter