World equity markets sold off and the euro set new two-year lows against the US dollar after reports that more indebted regions in Spain need financial aid fuelled fears that the country may need a bailout.
Investors fled to safe-haven government debt and the US dollar as Spain's plight, concerns about economic growth and renewed market talk of a possible Greek exit from the euro zone drove investment decisions.
The euro slid as low as US$1.2067, its weakest since June 2010, but later pared losses to trade slightly higher at US$1.2131. Against the yen, the euro slid near a 12-year low at 94.22 but later trimmed losses.
Spanish media reported that up to six regions may seek aid from the central government after Valencia asked for funds on Friday.
That request sent Spanish bonds to a euro-era high of more than 7.5 per cent, above the 7 per cent level many investors view as sustainable.
How Spain's 17 indebted autonomous regions, locked out of international debt markets, refinance €36 billion (NZ$55b) in debt this year has been a major source of concern for investors ever since they missed deficit targets last year.
''Given the market reaction on the back of the news that more and more regions are looking to tap into the liquidity fund ... it will be very difficult for Spain to circumvent further support for itself,'' said Norbert Aul, a rate strategist at RBC Capital Markets.
Spanish Economy Minister Luis de Guindos has insisted Spain does not need a full sovereign bailout, such as those approved for Greece, Ireland and Portugal.
The International Monetary Fund dismissed a weekend news report that it may refuse to continue supporting Greece as it prepares for talks with the new Greek government on its international bailout.
Worry over Greece resurfaced with international lenders scheduled to gather in Athens on Tuesday to discuss the terms of further rescue payments after its prime minister said the country was mired in a ''Great Depression.''
''All it does is it brings up that whole crisis again - all that tells you, it really didn't go away,'' said Ken Polcari, managing director at ICAP Equities in New York.