World stocks dipped to a one-week low on Thursday and the euro held near a five-week trough while safe-haven German bonds rose, as concerns grew over spillover damage to U.S. banks from the euro zone sovereign debt crisis.
The Spanish 10-year government bond yield hit a euro era high of 6.57 percent ahead of a key bond auction, which is likely to show the extent of damage from rising yields on the secondary market. France, which faces a battle to hold on to its coveted AAA credit rating, will also have a bond sale.
A clash between Germany and France over whether the ECB should intervene more decisively to tackle bond market turbulence also kept investors jittery, as many view an expanded role for the central bank as key to stopping a breakup of the single currency zone.
Contagion from the crisis to the global banking sector is becoming the top investor worry. Wall Street fell on Wednesday after Fitch Ratings warned it may lower its stable rating outlook for U.S. banks with large capital markets businesses due to fallout from the turmoil in European markets.
The euro hit a five-week low versus the dollar, a day after rating agency Moody's downgraded 12 German public sector banks seen as likely to receive less federal government support if needed.
The common currency dipped as low as $1.3421 before trimming losses to $1.3480.
Everyone's looking around saying we should be doing something but no one is making any decisions. It can't carry on like this, said Justin Urquhart Stewart, director at Seven Investment Management.
But how many weeks have we said that for? Germany needs to lead the way in a euro core, and then think about how we handle the periphery.
The MSCI world equity index fell 0.15 percent. European stocks <.FTEU3> lost 0.2 percent. The banking sector <.SX7P> fell 0.9 percent and emerging stocks <.MSCIEF> were steady on the day.
Brent crude oil fell 0.1 percent to $111.79.
Bund futures rose 30 ticks.
The dollar <.DXY> rose 0.31 percent to 78.26 against a basket of major currencies.
The euro zone's second-largest economy France, which has become the bloc's latest member to face market scrutiny over its fiscal deficit, called for more aggressive ECB bond purchases.
Germany, however, remains firmly opposed to using the central bank as the lender of last resort, saying it is up to individual governments to put their fiscal houses in order.
Spain is likely to face higher borrowing costs at its 3-4 billion euro auction of 10-year debt, while France plans to sell 6-7 billion euros in an auction that will be a litmus test for investor appetite, with Germany increasingly seen as the only safe haven in the euro zone.
(Editing by John Stonestreet)