Bankia Tumbles as Spanish Stocks Slide

Continued concerns about Spanish banks sent the country's stock market to fresh nine-year lows, the two-year German yield to zero and the euro to its weakest level against the dollar in nearly two years.

Investors scrambled for safe havens, dumping stocks as well as debt from Italy and Spain, two financially stressed nations that also are among the biggest in the 17-nation euro zone. They brushed off the European Commission's statement that the euro area's permanent rescue fund might be given permission to directly recapitalize the currency union's ailing banks, saying it would first need the direct agreement of Germany, the euro-zone's de facto pay master, and the European Central Bank.

Amid fast-moving events, Spain's IBEX 35 dropped for a third day, sliding 2.6% to 6090.40, its lowest close since April 1, 2003. Shares of Bankia tumbled another 8.6% for the sixth consecutive loss.

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The moves came as the ECB said it would oppose an attempt by Spain to use the central bank's lending facilities to fund the bailout of the troubled lender. Finance Minister Luis de Guindos clarified the government's rescue plan for Bankia, saying it will raise the €19 billion ($23.76 billion) needed for the bailout through sales of government bonds.

"The botched rescue of Bankia is fanning concerns over Spain's creditworthiness at a particularly inauspicious time for the euro zone," said Nicholas Spiro, managing director at Spiro Sovereign Strategy. "The bailout of Bankia, in whichever way it is undertaken, raises more questions than answers and brings Spain closer to an international rescue."

More

• Euro Slumps on Downbeat Data
• Global Stocks Drop on Spanish Worries

Overall, the benchmark Stoxx Europe 600 index fell 1.5% to 240.56, its fourth lowest close of the year. U.S. stocks also were lower, and the euro tumbled against the dollar.

In another sign of shrinking confidence in Spain's banking sector, retail and corporate deposits at its banks fell in April to the lowest level since the start of the euro-crisis, the ECB said.

Spanish 10-year yields soared 0.23 percentage point to 6.64% as European markets closed, while Italy's 10-year yield broke above 6%, rising 0.18 percentage point to 6.06%, according to Tradeweb. An auction of Italian bonds attracted tepid demand.

Borrowing costs at these levels are widely considered to be unsustainable in the long run. Indeed, strategists at Royal Bank of Scotland Group warned that Spanish 10-year yields are likely to hit 7% in the coming weeks, which they said could prompt market intervention by the ECB or the euro zone's bailout fund.

Meanwhile, the yield on the 10-year German bond hit an all-time low of 1.261% as nervous investors clamored for the safety of German debt, before ending the European session at 1.27%, down 0.10 percentage point. Yields on the country's two-year notes at one point hit zero for the first time, raising the prospect that investors could soon be paying for the privilege of parking their funds. They ended the day at 0.007%, down 0.04 percentage point.

The benchmark 10-year U.S. Treasury yield hit a new record low of 1.642% Wednesday and the 10-year U.K. gilt fell to a record low of 1.653%.

Further adding to the pressure on stocks, the European Commission said its economic sentiment indicator for the currency area fell to 90.6 in May from 92.9 in April, the lowest level in 31 months. Euro-zone business confidence slumps in May

Among major national benchmarks, the U.K.'s FTSE 100 index dropped 1.7% to 5297.28. With one trading day left in May, it has plummeted 7.7% and could end with its biggest monthly fall since February 2009.

France's CAC-40 skidded 2.2% on Wednesday to 3015.58 and Germany's DAX fell 1.8% to 6280.80.

Miners fell on a report from the Xinhua News Agency suggesting that the Chinese government won't launch anything on the scale of its 2008 stimulus, despite reports to the contrary on Tuesday. Kazakhmys slid 4.3% and Rio Tinto dropped 4.1%.

Falling energy prices pushed down BG Group, which skidded 4.6%, and BP, which lost 2.1%.

In the currency markets, the euro sank to $1.2386, its lowest point since July 6, 2010, before recovering to $1.2400, down from $1.2503 late Tuesday.

—Ishaq Siddiqi and Tommy Stubbington contributed to this article.

Write to Sara Sjolin at sara.sjolin@dowjones.com