The financial storm on the continent gathered pace today after a key
agency slashed the credit ratings of several Spanish banks - including
the UK arm of Banco Santander.
European markets suffered further losses after Moody's Investor Service downgraded 16 Spanish lenders, blaming the move on the country's waning ability to shore up its banks.
However, a spokesman for Santander UK reassured customers that it was "completely autonomous" from its parent firm, adding that "money raised in the UK stays in the UK".
As Spain's woes deepened, investors continued to be troubled by political turmoil in Greece, where a caretaker government has stepped in to steer the debt-ridden country into repeat elections next month.
Jordan Lambert, trader at Spreadex, said the "environment is getting increasingly bleak" with Moody's downgrade of the Spanish banks adding to the "sour taste".
The FTSE 100 Index lost nearly 1%, while France's Cac-40 fell 1% and the Dax in Germany lost 0.5%. Spain's Ibex-35, however, rose 0.5%.
While Spain saw its implied borrowing costs pull back slightly, the yield on 10-year bonds still remained above 6%, in a sign that investors lack confidence in the country's finances.
Moody's debt downgrade came after the Spanish government was forced to deny there had been a run on the country's fourth biggest lender, Bankia, amid reports that 1 billion euros (£800 million) had been withdrawn since it was nationalised last week.
Bankia, which was bailed out last week when the government converted loans into a 45% stake, saw shares recover 30% today, following a 30% plunge yesterday.
Greece, which some fear will have to exit the euro if an anti-austerity party is elected in June, was also hit with a downgrade from ratings agency Fitch.
The "heightened risk" that the political and economic crisis could drag the country out of the single currency prompted the move, Fitch said.
In the US, a disappointing manufacturing report sparked fears over the country's economic recovery in overnight trading but all eyes were on Facebook's pending flotation on the New York Stock Exchange.
The social-networking site will offer shares for 38 US dollars (£24) a piece, valuing it more than 100 billion dollars (£66 billion), in a move that some analysts hope might distract from the crisis in Europe.
Chris Weston, institutional trader at IG Markets, said: "Tonight is all about Facebook, and we thoroughly expect a good day's showing on its first day of trade.
"One hopes a positive tape will lift spirits, if for no other reason than to give traders something other than Greece to think about."
The developments came after David Cameron issued a call for action from eurozone states and institutions to support weaker economies such as Greece or see the single European currency break up.
The Prime Minister said he would do "whatever it takes to keep Britain safe from the storm", but made clear that the UK could not be immune from the consequences of a collapse of the euro.