Markets hit by Spanish woes

European equities have sunk and the euro hit a new two-year US dollar low, as sentiment was jarred by spiking Spanish bond yields, eurozone debt fears and receding hopes of fresh US Fed stimulus measures.

Madrid stocks slumped on Thursday and Spanish 10-year bond yields surged back towards the danger level of 7.0 per cent, as investor enthusiasm evaporated over the government's vast 65-billion-euro ($A78.07 billion) austerity package.

The country's IBEX 35 index of top companies tumbled 2.14 per cent to 6,659.7 points in early afternoon deals.

Elsewhere in Europe, London's FTSE 100 slid 1.04 per cent to 5,606.01 points, Frankfurt's DAX 30 index dropped 1.01 per cent to 6,388.48 points and in Paris the CAC 40 fell 0.49 per cent to 3,141.73.

Rome's FTSE Mib index dipped 1.53 per cent at 13,649.62 points, despite news of a successful 7.5-billion-euro ($A9.00 billion) Italian government bond sale.

And the European single currency slumped to $1.2170 - which was the lowest level since June 30, 2010.

Traders said that Wednesday's Spanish austerity measures had failed to alleviate eurozone debt crisis fears, while the US Federal Reserve appeared unlikely to deliver any further stimulus measures any time soon.

"Spanish bonds are under renewed... pressure as investors doubt the wisdom of the latest fiscal consolidation measures announced by the government," RIA Capital Markets analyst Nick Stamenkovic said.

"Indeed, the risk is that the latest budget deficit reduction measures compound the worsening growth outlook and deteriorating fiscal dynamics. Hence the euro is moving to new lows as confidence in the single currency continues to ebb away."

Traders were also on the back foot after minutes from the most recent US Federal Reserve June meeting suggested that officials were split on further stimulus measures to aid the US economy.

"There was no smoking gun from the latest Fed minutes for an imminent easing. Hence fears of (more stimulus) have eased, supporting the dollar," added Stamenkovic.

Wall Street also fell on Wednesday after publication of the Fed minutes, with the Dow Jones Industrial Average finishing down 0.38 per cent.

Several top policymakers urged the central bank to look at new tools to bolster the financial system amid a weak recovery, but the minutes also showed the Fed split on how, when and if to provide more stimulus.

Across in Asia, stock markets mostly plunged on Thursday on growing fears of a regional slowdown after South Korea unexpectedly cut interest rates and Japan's central bank also failed to announce major new stimulus measures.

The news spooked investors who were already nervous a day before China releases key data expected to confirm slowing growth in the world's second-biggest economy.

Hong Kong dropped 2.03 per cent, Seoul closed down 2.24 per cent, Sydney fell 0.70 per cent and Tokyo fell 1.48 per cent, but Shanghai eked out a gain of 0.46 per cent.

By cutting its key interest rate 25 basis points to 3.00 per cent, South Korea's central bank joined an international drive to ease the impact of the eurozone debt crisis that threatens export-dependent Asian economies.

The bank said in a statement the domestic economy was under pressure "due mostly to the increase in euro area risks and the sluggish economies of its major trading partners".

The reduction was the first since February 2009, when the key rate hit a record low of 2.00 per cent.

The European Central Bank and China's central bank cut their rates last week, while Brazil on Wednesday slashed its rate to a record low.

But the Bank of Japan took no major new action despite lowering its growth forecast for the fiscal year, to 2.2 from 2.3 per cent, surprising some analysts.

Following a two-day policy meeting, the bank said it would keep rates steady at zero to 0.1 per cent and fine-tuned a 70 trillion yen ($A861.18 billion) asset-purchase program but the size of the policy tool remained steady.

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