German government bond yields hit all-time lows while Spanish borrowing costs rose sharply Monday as worries intensified over whether Greece is edging towards leaving the euro zone, sapping demand for riskier assets.

No one wants to buy peripheral debt when people are openly talking about Greece leaving the euro zone, a senior London-based trader told Dow Jones Newswires.

The sentiment is very weak and investors are selling Italian and Spanish bonds at every opportunity, the trader said.

Greek party leaders are to resume power-sharing talks Monday in a bid to avoid fresh elections. However, chances of success have been diminished after the radical left Syriza party, which came second in the country's May 6 elections, declined to participate.

The turmoil renewed fears that Greece won't be able to implement the harsh budget-balancing measures demanded by European partners in return for a €130 billion bailout package that Greece needs to remain solvent.

There's a real risk for the market that as some point Greece will have to leave the euro if they don't find political cohesion...This will add to the contagion in the market and the countries that will suffer more are Spain and Italy, ING strategist Alessandro Giansanti told Reuters.

Yields on German, U.K., Dutch, Swedish and Finnish government debt all plunged to their lowest levels on record as investors' demand for top-quality paper soared.

The yield on the 10-year German Bund hit a fresh record-low of 1.44 percent, the 10-year U.K. government bond fell to a low of 1.87 percent.

Yields on government debt from Sweden traded as low as 1.44 percent, while comparable bonds from the Netherlands and Finland traded at 1.96 percent and 1.79 percent, respectively.

Meanwhile, yields on Spanish and Italian government bonds rose as the countries carried out bond auctions Monday.

Spanish 10-year yields rose by a worrying 26 basis points to 6.27 percent, a yield last seen at the start of December. Any rate above the 6 percent benchmark raises the risk that Spain might need a bailout of its own.

 If Spanish yields go above 6.5 percent the ECB will have to calm the market to try and cap the level of yields because we don't want to go into a situation where Spain's yields are sky-rocketing to 7 percent, Giansanti told Reuters.

Spain raised 2.9 billion euros in 12- and 18-month bills Monday, just under the top of the targeted range.

While Spain has already reached over half of its total gross debt issuance target this year, the country faces a tougher test on Thursday when it will auction 3- and 4-year bonds, where it may need to rely on domestic buyers as foreign investors are becoming increasingly concerned about Spain's longer-term stability.

Also on the rise, Italian bond yields rose by 22 basis points to 5.72 percent.