Fresh evidence of the strains in the eurozone emerged on Wednesday after Spain reacted angrily at being blamed by Italy for the latest flare-up in the single currency's debt crisis.
Despite attempts by the European Central Bank to ease the selling pressure in Europe's financial markets, a war of words threatened to erupt between Rome and Madrid over alleged comments by the Italian prime minister, Mario Monti, blaming Spain for the sell-off of the past week.
The price of both Spanish and Italian bonds rose after the ECB said it might intervene in financial markets, but Spain's prime minister, Mariano Rajoy, said leaders of other countries needed to be careful about what they said about his country.
"I wish to say the following with regard to some statements which have been made in the EU, and more explicitly last night by some EU leaders," Rajoy told parliamentarians from his governing People's Party, falling short of mentioning Monti by name.
"We hope that they assume their responsibilities and are more cautious in their statements. We don't talk about other countries. We wish other EU and euro zone countries the best. What is good for Spain is good for the euro zone."
Rajoy's remarks came on a day when official figures showed industrial production in Spain falling for a sixth successive month in February to a level 5.1% lower than a year earlier.
Privately, government officials in Madrid were demanding greater support from the rest of Europe for Rajoy's austerity programme, which aims to bring the country's budget deficit down to 3% of national output next year.
Italian newspaper Corriere della Sera on Wednesday said Monti told aides during a visit to the Middle East that Italy was "paying on the rebound for the Spanish crisis". Although Monti's office denied that he had made the remarks, the Italian prime minister had already prompted unease in Madrid three weeks ago after publicly expressing concern about Spain's public finances.
ECB executive board member Benoit Coeure sought to ease the market pressure by saying that what was happening in Spain, where sovereign debt yields have spiked back to 6% amid concerns over the country's ability to cut its deficit, did not reflect the fundamentals.
He added that the Frankfurt-based institution, which has injected about €1tn into the financial system since December, still had its bond-buying programme as an option to intervene in support of Spain.
Meanwhile, Rajoy's call for more support from his European partners appeared to pay off when Germany and France praised Madrid for its "huge efforts" to reform the economy and regretted they were not recognized by investors.
As Italian and Spanish bonds recovered some of the ground lost in the past week, share prices rebounded and demand abated for safe-haven investments such as US Treasury bills and German bunds. The FTSE in London closed 39.19 points higher at 5634.74 while the Dow Jones was up by almost 1% in early trading.
"This is a natural reaction to retrace some of yesterday's move given that Spain is trading a little better and Italy is trading a little better. Yesterday's move was all about European contagion and now things look a little more cheery than they did yesterday. The flight to quality mentality is reduced a little bit," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York. Dealers said the price of bunds had also been affected by poor demand from investors in today's auction of German government debt.
Oil slipped below $120 a barrel on Wednesday and traded near its lowest in almost two months, pressured by rising US inventories and concern about the strength of global demand.
The euro was up 0.5% at $1.3140, having hit a high of $1.3156, with traders saying it was propped up by demand from hedge funds reportedly buying on dips.
