The euro zone's debt crisis swept closer to the heart of Europe despite a clear-cut election victory in Spain for conservatives committed to austerity, adding to pressure on the European Central Bank to act more decisively.
Spain's Socialists became the fifth government in the 17-nation currency area to be toppled by the sovereign debt crisis this year. Portugal, Ireland, Italy and Greece went before, while Slovakia's cabinet lost a confidence vote last month and faces a general election in March.
An absolute parliamentary majority for Mariano Rajoy's centre-right Popular Party brought no respite on financial markets increasingly alarmed by the absence of an effective firewall to halt a meltdown on sovereign bond markets.
Rajoy kept investors, and Spaniards, guessing about his plans to tackle the crisis, saying the constitution will make him wait until just before December 25 to name an economy minister and explain how he will get five million people back to work.
The risk premiums on Spanish, Italian, French and Belgian government bonds rose as investors fled to safe-haven German Bunds, while European shares <.FTEU3> fell more than 3 percent after Moody's warned that France's credit rating faced new dangers.
This crisis is hitting the core of the euro zone. We should have no illusions about this, European Economic and Monetary Affairs Commissioner Olli Rehn said.
He defended the European Union executive's advocacy of austerity policies blamed for choking off growth and jobs.
One simply cannot build a growth strategy on accumulating more debt, when the capacity to service the current debt is questioned by the markets, Rehn told a Brussels seminar. One cannot force foreign creditors to lend more money, if they don't have the confidence to do it.
Greece's new technocrat prime minister, Lucas Papademos, on his maiden trip to Brussels, won an assurance that euro zone finance ministers should be in a position to agree at their next meeting, next Monday, to disburse vital bailout funds to avert bankruptcy.
Papademos was expected to meet European Central Bank chief Mario Draghi on Tuesday evening in Frankfurt.
Borrowing costs for both Spain and Italy hit levels regarded as unsustainable last week before the European Central Bank stepped in temporarily to steady the market.
Two newspapers said the ECB's governing council had imposed a weekly limit of 20 billion euros on purchases of euro zone government bonds, a figure analysts say prevents it wielding massive deterrent power in the markets. Germany's central bank has led resistance to the bond-buying it sees as inflationary.
The latest weekly figures released on Monday showed the central bank bought nearly 8 billion euros in the week to last Wednesday, far below that reported limit in a week when Italian and French spreads hit euro era highs.
Critics say this reluctant, piecemeal approach is aggravating the situation rather than restoring confidence.
ECB governing council member Ewald Nowotny, regarded as a dove, told a conference in Vienna that the central bank could not simply start printing money but would have to discuss its next response to the crisis.
What we certainly have to discuss is what is a role for the ECB in these difficult times, but this is also something we will discuss in Frankfurt at the appropriate time, he said.
FRENCH RATING RISK
Ratings agency Moody's said a recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France's credit rating.
Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications, Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated November 21.
France's government spokeswoman insisted on Monday that Paris would not impose a third package of budget savings, despite market pressure on its cost of credit.
Talk of a possible break-up of the 12-year-old single currency has grown among analysts, mostly outside the euro area, as EU paymaster Germany has rejected most of the widely-touted solutions to the debt crisis.
The chairman of Goldman Sachs Asset Management, Jim O'Neill, said the crisis of European economic and monetary union (EMU) meant big decisions have to be taken pretty quickly.
It's not obvious to me that EMU could survive without Italy, he told a Confederation of British Industry conference.
It's not obvious to me that Italy can survive with 6-7 percent bond yields, so something's going to have give pretty quickly. Italian bond yields have got to come down pretty quickly or EMU will have some severe challenges.
Dutch Finance Minister Jan Kees de Jager, one of Berlin's closest allies, acknowledged that the euro zone could splinter.
Asked whether a break-up of the euro would cause an economic depression, he told BNR radio: This could be a consequence from the euro zone falling apart, that is correct.
The chief executive of Deutsche Bank
Spaniards gave the People's Party a clear mandate for more austerity against a background of 21 percent unemployment and one of the highest budget shortfalls in the region.
We will stop being part of the problem and will be part of the solution, Rajoy said after the vote.
Nicolas Lopez, head of research at M&G Valores, said the government had to introduce convincing measures. While these measures are being taken, the ECB will have to buy up bonds as it has been doing to maintain confidence, he said.
(Additional reporting by Gilbert Kreijger in Amsterdam, Kirsten Donovan and Fiona Sheikh in London, Lefteris Papadimas in Athens, Crispian Balmer in Rome and Jan Strupczewski in Brussels; Writing by Paul Taylor; Editing by Mike Peacock)