Global equity markets pared gains and government debt prices rose on Monday as worries about Spain's fiscal problems and a resurgent euro zone crisis overshadowed optimism generated by higher-than-expected U.S. retail sales in March.
The dollar retreated against the euro while oil prices fell after Spain acknowledged it has probably tipped into its second recession since 2009.
Spanish 10-year government bond yields broke through the 6 percent mark for the first time since early December, raising concerns that the government's borrowing costs could quickly reach unaffordable levels.
The overall mood is one of risk aversion after the news from Spain, said Eugen Weinberg, an energy analyst at Commerzbank in Frankfurt.
Credit default swap spreads are at record high levels and Spanish banks are having trouble getting money in the markets and are going to the European Central Bank instead. That is weighing on sentiment.
Concern is growing that the recession will make it impossible to meet deficit targets and that Spain will have to seek some form of international bailout even as the Spanish government says it is committed to making major budget cuts.
The cost of insuring Spanish debt against default hit a record high at 522 basis points, meaning it costs $522,000 a year to buy $10 million of protection, according to data from Markit.
German Bund futures rose to a new high of 140.56, up 20 ticks on the day, while 10-year German Bund yields set a record low earlier in the session at 1.622 percent.
Stocks were supported by a report on U.S. retail sales for March which came in higher than expected, suggesting economic growth in the first quarter was not as weak as many had feared.
Total retail sales increased 0.8 percent after rising 1.0 percent in February, the Commerce Department said, as Americans shrugged off high gasoline prices.
The sales gain surpassed economists' expectations for only a 0.3 percent rise and could prompt analysts to raise their first-quarter growth forecasts of about 2.5 percent annually.
The Nasdaq fell sharply, weighed down by a 2.8 percent drop in Apple Inc
The Dow Jones industrial average <.DJI> was up 70.61 points, or 0.55 percent, at 12,920.20. The Standard & Poor's 500 Index <.SPX> was down 0.24 points, or 0.02 percent, at 1,370.02. The Nasdaq Composite Index <.IXIC> was down 17.96 points, or 0.60 percent, at 2,993.37.
In Europe stocks pared gains, but were still higher. The FTSE Eurofirst <.FTEU3> index of top European shares was up 0.7 points at 1,035.14.
The dollar was down against a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> down 0.06 percent at 79.844.
The euro was down 0.03 percent at $1.3071, while against the Japanese yen, the dollar was down 0.59 percent at 80.41 yen.
The benchmark 10-year U.S. Treasury note was up 9/32 in price to yield 1.96 percent.
Oil futures extended losses to more than 2 percent on news that the Seaway crude oil pipeline's reversal would begin earlier than expected if regulatory approval is secured, sparking heavy transatlantic spread trading.
The further drop in futures added to a bearish mood in the oil markets that had earlier felt pressure on euro zone worries triggered by Spain's debt problems and weekend talks between Iran and six world powers about its disputed nuclear program.
Brent crude for June delivery was down $2.65 at $118.56 a barrel.
U.S. crude for May delivery which expires on Friday, was down 76 cents at $102.07.
Euro zone debt crisis http://r.reuters.com/hyb65p
Italy & Spain market view: http://link.reuters.com/xyq57s
ECB bond buying and euro zone bond yields:
(Additional reporting by Richard Hubbard in London; Editing by James Dalgleish)