Eurozone markets tumble as Spain bails out sick bank

Markets became jittery over the Spanish government's take-over at the weekend of regional savings bank Cajasur, which raised speculation that more unhealthy financial institutions may have to be bailed out to prevent a meltdown of the country's banking system.

Market analysts said Cajasur was on the verge of bankruptcy after it lost more than 740 million euros invested in the country's troubled real estate and construction business and there are several other banks facing a similar crisis.

The International Monetary Fund's (IMF) appeal to the Spanish government on Monday to implement "far-reaching reforms" compounded fears that the economic woes of the heavily-indebted eurozone nation might be worsening.

There were also concerns that the troubles of Spain's banking sector could hit the continent's other banks, already reeling under the eurozone debt crisis.

Worries over the condition of Spain's banking sector wiped out the slight recovery of the euro last Friday from a four-year low earlier in the week and the common currency of 16 EU nations dropped again by 1.50 per cent to 1.240 euros against the dollar at Monday's close in European trading.

The new British government's tough austerity measures announced by Chancellor of the Exchequer George Osborne in London to save up to 6.2 billion pounds (around 9.3 billion dollars) this year raised fears that the debt crisis may be spreading to EU countries outside the eurozone.

Osborne said the cuts in "wasteful spending" are needed to reduce the country's budget deficit, which was 156 billion pounds in 2009-10.

In Frankfurt, the benchmark index DAX lost 1.5 per cent when it dropped to 5,733 in early trading, but recovered rapidly in the afternoon and reached the plus zone briefly on news that US home sales in April rose by 7.6 per cent to 5.77 million, much higher than expected by investors.

However, the DAX shed some of its gains in later trading and closed 0.4 per cent lower at 5,805.

In Madrid, the IBEX index closed 1.27 per cent lower and the Zurich SMI was down by 0.89 per cent, while the FTSE in London edged up by 0.13 per cent and the CAC 40 in Paris ended 0.01 per cent higher.

European banking shares were among the hardest hit in Monday's trading.