European shares and the euro steadied on Thursday after recent sharp losses, as investors awaited a critical G20 summit dominated by the eurozone debt crisis and pressure on Greece and Italy.
As leaders of the world's most powerful economies gathered in the French resort of Cannes, Greece was plunged into fresh political turmoil after its bailout referendum call, and Italy's borrowing costs hit record high levels.
London's FTSE 100 index of leading companies dipped 0.08 percent to 5,479.67 points in morning London trade, Frankfurt's DAX 30 shed 0.31 percent to 5,949.70 points and in Paris the CAC 40 lost 0.24 percent to 3,103.01.
Milan's FTSE Mib index slid 0.40 percent to 15,212.50 points, as Italian 10-year government bonds struck a record above 6.402 percent, a level which puts Italy's borrowing costs close to unsustainable levels.
At the same time, the gap or spread between German and French 10-year sovereign borrowing rates widened to a record amount, amid concern that Europe's crisis could plunge the world into renewed recession.
The euro meanwhile dropped to $1.3700 from $1.3746 in New York late on Wednesday, ahead of the European Central Bank's first interest rate decision under its new Italian chief Mario Draghi.
European leaders have issued debt-laden Greece with an ultimatum ahead of the G20 summit in Cannes.
Summit host President Nicolas Sarkozy and German Chancellor Angela Merkel warned Greece it would not get "one more cent" from the EU and the IMF unless Athens abided by the terms of a rescue deal agreed last week.
German Chancellor Angela Merkel said: "Does Greece want to remain part of the eurozone or not? That is the question the Greek people must now answer."
Without its next eight-billion euro transfer, observers warn, Greece would face problems paying government salaries and a messy debt default within weeks.
"The news that aid will be suspended to Greece until the referendum confirms their intentions about whether they will accept the new bailout terms and stay in the euro is keeping much uncertainty in the markets," said analyst Joshua Raymond at trading firm City Index.
"We are also hearing that there is going to be another emergency cabinet meeting taking place later this morning in Greece, and there are rumours that there could be a snap election."
He added: "At the very least it seems the latest developments have marginalised Papandreou further both from Greek lawmakers and Europe itself."
The EU had clinched a major debt deal last week in Brussels that would have handed Greece an additional 100-billion-euro bailout.
However, the deal has now been thrown into doubt after Greek Prime Minister George Papandreou sprang a surprise move on Monday to hold a referendum on the latest rescue deal.
With the Greek public already fed-up at swingeing austerity cuts there is a chance they will vote "No" in a referendum, sending Greece and the eurozone into chaos and threatening another global financial meltdown.
Later on Thursday, the ECB is expected to hold off from interest rate cuts to douse the flames of the eurozone debt crisis, as its controversial bond-buying programme continues to help prop up the Italian bond market.
"The ECB will throw its weight behind Italy's bonds in an attempt to keep yields low," said GFT analyst David Morrison.
He added: "Italy is undoubtedly in trouble ... but even with support for a leveraged EFSF -- from China for instance -- Europe cannot afford to bail out Italy."
Asian markets also fell after warnings Greece's bailout cash was imperilled by a planned referendum that has raised the prospect of it ditching the euro.
The deteriorating eurozone crisis has prompted many analysts to predict a new recession across the region.
"The policymakers’ latest response to the debt crisis is already unravelling and will not prevent both economic recession and further financial turmoil," predicted economist Roger Bootle at the Capital Economics consultancy.
"As such, the future of the single currency remains under serious threat," he added.