Spain tumbled into recession and European stock markets and the euro fell Thursday as Greece installed a crisis government and the spectre of a run hung over eurozone banks.
However European leaders moved to resolve an emerging split over how to deal with the crisis, agreeing that both growth and cutting budget deficits are needed.
"Markets are worried about eurozone bank deposit runs and an escalating banking crisis," London-based VTB Capital economist Neil MacKinnon told AFP after heavy withdrawals of deposits have been reported in Greece and Spain.
A caretaker government took office in Athens on Thursday to organise its second election in six weeks after an inconclusive May 6 vote as fears over its possible euro exit rocked Spain and Italy.
The election left Greece in limbo and the new poll on June 17 offers no guarantee of a viable government able to implement an EU-IMF bailout which has divided the country.
The International Monetary Fund announced Thursday that it would hold off on official contacts with Greece until after the June 17 elections and Fitch ratings agency downgraded Greece a notch to CCC "vulnerable to default" rating.
The IMF, which along with the EU is all that stand between Greece and a disorderly default and eurozone exit, have warned that no new funds will be released from the latest 240-billion euro ($305-billion) bailout if progress on pledged reforms and tough austerity measures falters.
The suspension of contacts effectively delays a review due to have begun soon on which the release of $1.6 billion by the IMF from the beginning of June was dependent.
Meanwhile, Europe's single currency nosedived to a new four-month low at $1.2667 before recovering some ground.
"Confidence in European equities (is) quickly depleting, this time after the European Central Bank admitted it had stopped providing liquidity to some Greek banks," noted analyst Craig Erlam at trading group Alpari.
The ECB said Wednesday that it was no longer dealing with some Greek banks via the conventional credit window, Dow Jones Newswires reported, and has restricted the banks to "emergency lending assistance" from Greece's central bank that must be approved from month to month.
"Add this to the long list of other eurozone problems and investors are finding it very difficult to justify taking on the additional risk associated with the eurozone," Erlam said.
But in a videoconference held in the evening the leaders of Britain, Germany, France, Italy and senior EU officials sought to address an emerging split that threatened to paralyse European policymaking.
"There was a high degree of agreement that fiscal consolidation and growth are not mutually exclusive but that both are needed," a spokesman for German Chancellor Angela Merkel said in an email.
New French President Francois Hollande was elected on a promise to negotiate the new EU fiscal pact to include growth measures, with Finance Minister Pierre Moscovici warning Thursday it would not ratify the treaty unless the issue is addressed.
Merkel, the leading proponent of the fiscal pact, has said cutting budget deficits is a necessary precondition for long-term growth.
British Prime Minister David Cameron had earlier called for eurozone leaders to take decisive action or face the break up of the single currency.
Britain is not a eurozone member but the bloc is a key trading partner and fallout from the debt crisis is having a serious effect on the entire 27-member European Union.
Those risks were underscored in Madrid, where the national statistics institute INE said the fourth biggest eurozone economy had contracted by 0.3 percent in the first quarter of 2012.
That was the same decline seen in the last three months of 2011 and confirmed that Spain was officially in recession, defined as two straight quarters of economic contraction.
Italy, the third biggest eurozone economy, is also in recession, while number two France has only narrowly escaped a similar fate.
The Spanish government paid higher rates to place three- and four-year bonds with wary investors Thursday, while a state-controlled bank, Bankia, was reportedly hit by heavy withdrawals by clients, a dire situation seen also in Greece this week.
Germany's benchmark 10-year bond saw its own rate reach a new record low of 1.420 percent as investors fled to financial safe-havens.
Shares in Bankia, which was created in 2010 from a merger of seven savings banks, dropped by 14.08 percent to 1.422 euros after having tumbled nearly 28 percent at one point.
Spain's Ibex-35 index ended down 1.11 percent.
The daily newspaper El Mundo reported that Bankia managers told the board the bank had lost a "similar amount" of deposits this week as the 1.16 billion euros withdrawn by clients in the first quarter of the year.
However the government and Bankia rejected the report.
European stocks markets were rocked by the heightened tension, and fell in afternoon trading, with banking issues taking some of the heaviest losses.
London's benchmark FTSE 100 index fell 1.24 percent, while Frankfurt's DAX 30 dropped 1.18 percent, Paris's CAC 40 fell 1.20 and Milan's FTSE-Mib tumbled 1.46 percent.