Strikes in Greece and Spain highlighted resistance to Europe-wide austerity measures on Tuesday as the euro and shares tumbled ahead of a deadline for banks to repay a giant European Central Bank cash injection.
The fifth major strike this year by Greek unions disrupted tourism and public transport in protest at planned pension cuts and later retirement, while Spanish workers shut down Madrid's metro system in anger at a 5 percent public sector pay cut.
Riot police in Athens fired teargas at a group of black-hooded youths hurling stones and petrol bombs and chanting Burn parliament, hours before lawmakers were due to debate the sweeping EU/IMF-mandated pension reform.
Public and private sector unions announced plans for a new 24-hour stoppage in early July over the pension plan. But turnout at Tuesday's protest marches was down to about 12,000, suggesting a growing, sullen resignation to austerity.
The risk premium on southern European government bonds over benchmark German bunds widened and the cost of insuring their debt against default rose as investors fled risks from the wider repercussions of the Greek debt crisis at the end of the quarter, a frequent period of stress.
Euro zone policymakers sought to reassure markets that Thursday's crunch time for banks to repay a record 442 billion euro ($539.4 billion) one-year liquidity injection would be managed smoothly.
Spanish Economy Minister Elena Salgado said she hoped the ECB was aware of the situation of her country's stressed banks, some of which have been shut out of inter-bank lending due to worries over bad debts and public finances.
The ECB says it doesn't like governments to tell it what to do. I simply say I hope that in this occasion, as in others, the ECB will be aware of the needs of the Spanish financial system, Salgado told Spanish radio.
Thursday's repayment deadline coincides with the automatic date for some index-linked funds to dump Greek bonds from their portfolio after they were downgraded to junk status by ratings agency Standard & Poor's in June.
The ECB and the Eurosystem will do what is necessary to make sure the liquidity is there, ECB Governing Council member Christian Noyer told France's Europe 1 radio.
You shouldn't exaggerate things or be excessively worried, he said of potential problems in money markets, while conceding that some banks may suffer.
His colleague Ewald Nowotny said the ECB was committed to offering extra funds to ensure there is no liquidity squeeze.
The central bank has said it will provide unlimited three-month liquidity at its base rate of 1 percent until the end of the year, effectively putting its exit strategy from exceptional crisis-induced liquidity provision on hold.
Banks in Spain, Portugal and Greece have become disproportionately dependent on ECB funds because of difficulty accessing private sector financing due to concerns about their exposure to their country's sovereign and private debt.
The Greek central bank reported on Tuesday that bank deposits by Greek businesses and households dropped in May for the fifth consecutive month to 220 billion euros, bringing cumulative deposit losses this year to 18 billion euros.
The Financial Times reported that Spanish banks were furious the 12-month scheme would not be rolled over and wanted the ECB to offer more longer-term loans.
The health of Spain's banking sector has been a concern for international investors since a decade-long housing bubble burst, ushering in the worst recession in half a century.
While Greece has received a 110-billion-euro bailout from the euro zone and the International Monetary Fund in return for deep austerity measures to cut its huge deficit, Spain and Portugal are implementing milder budget cuts to try to avoid recourse to a 750 billion euro financial safety net.
In another indication of rising stress, the Euribor rates at which banks lend to each other in euros hit their highest levels in more than nine months on Tuesday ahead of the ECB deadline.
Concerns about liquidity supply helped push the euro to a lifetime low against the Swiss franc and a 1-1/2-year low against sterling.
European shares fell to their lowest in nearly three weeks with the main pan-European share index down 2.3 percent by mid-afternoon and Wall Street also saw a sharp fall.
Investors are concerned that the combination of coordinated austerity measures across Europe and unresolved bank debts could derail a fragile economic recovery.
In a rush to reassure investors that some of the continent's biggest banks are healthy, sources in Germany said the first three German banks to be subjected to European stress tests -- Deutsche Bank, Commerzbank and BayernLB -- had passed the test of their ability to withstand financial shocks. They did not disclose the risk criteria.
Euro zone economic sentiment improved slightly in June after falling sharply the previous month at the peak of uncertainty over a euro zone rescue fund.
(Additional reporting by Ingrid Melander in Athens, Blanca Rodriguez and Sonya Dowsett in Madrid, Crispian Balmer in Paris, Marcin Grajewski in Brussels; writing by Paul Taylor, editing by Jason Neely/Ruth Pitchford)