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European stocks slump to year lows on debt fears

European stocks closed down for the third day and fell to lows not seen since last August amid concerns over European and US sovereign debt issues which kept investors at bay.

The downbeat trading mood was not helped by the latest round of European bank stress tests which failed to factor in the threat of a Greek default.

This led to a 26-month low in a European index of top banks after it emerged that lenders may have to raise as much as €80bn in additional capital.

As shares slumped across Europe, the cost of insuring against default on European sovereign debt, including bonds sold by Ireland, Greece, Italy, Portugal and France, rose to record highs.

Italy’s 10-year bond yields exceeded 6pc, approaching the 7pc mark that prompted smaller countries like Ireland to seek bailouts.

National indexes fell across Europe and the ISEQ index of Irish shares was off just under 1pc when European markets closed.

Germany’s DAX lost 1.5pc and the French CAC 40 fell 2pc while some of the main losers were big German finance houses like Deutsche Bank.

In the UK, the FTSE 100 was down 1.5pc.

European leaders plan to meet for the second time in a month in Brussels on Thursday to revamp their debt strategy.

But markets are spooked because while Germany said it is confident officials will reach agreement on funding a second bailout for Greece, the European Central Bank President Jean-Claude Trichet reiterated its opposition to any Greek debt restructuring.

When European markets closed, investors were also dumping shares in the US on the European fears as well as a lack of progress in US debt-ceiling negotiations.

The only winner was gold which reached new highs of $1,600 an ounce.