Europe's debt crisis weighs on markets again

Stock markets and the euro were back under pressure Friday as investors fretted over a report suggesting Portugal's partners in the European Union were urging the country to seek aid to prevent a sustained attack from bond market speculators.

The report from FT Deutscheland, which cites unnamed European Central Bank officials, was denied by the ECB and the German finance ministry. It comes after suggestions the EU is willing to boost the size of its financial backstop facility and that officials in Dublin are considering forcing Irish bank bondholders to take a hit in the country's rescue plan.

Germany and France have meanwhile said they would like faster progress in solving the debt crisis.

With so much uncertainty surrounding Europe's response to its continuing debt crisis, sentiment in the markets took a turn for the worse.

"This confusing 'pea-soup' of indecision, vacillation and disunity by the EU is beginning to create unnecessarily seismic waves of fear in international bond and money markets," said David Buik, markets analyst at BGC Partners.

In Europe, the FTSE 100 index of leading British shares was down 63.91 points, or 1.1 percent, at 5,635.02 while Germany's DAX fell 77.29 points, or 1.1 percent, to 6,802.37. The CAC-40 in France was 61.08 points, or 1.6 percent, lower at 3,699.34.

Wall Street was poised to open lower on its return from the Thanksgiving break - Dow futures were down 83 points, or 0.7 percent, at 11,072 while the broader Standard & Poor's 500 futures fell 13.90 points, or 1.2 percent, to 1,185.50. U.S. markets will be open only for a half day.

Stocks weren't the only financial assets feeling the heat Friday. The euro was down another 0.8 percent on the day at $1.3247, just above its earlier fresh two-month low of $1.3219.

Meanwhile, the cost of borrowing for the countries at the epicenter of Europe's debt crisis ratcheted up again, in a fresh sign that Ireland's request for a massive bailout last weekend has done nothing to ease fears that another country, possibly Portugal, or more dangerously Spain, will be the next victim.

The prevailing view in the markets is that Europe may be able to support Portugal but that a bailout of Spain would test the limits of the existing bailout fund, putting the euro project itself in jeopardy if governments don't put up more cash. Spain accounts for around 10 percent of the eurozone economy, in contrast with the other three countries, which account for around 2 percent each.

Spain's yield on its ten-year bond yields rose 0.09 percent to 5.26 percent, while Portugal's rose 0.04 percent to 7.06 percent.

Portugal remains in focus Friday as its Parliament is set to approve a plan to hike taxes and cut salaries and welfare benefits next year. The minority government insists it won't need financial rescue, saying the austerity measures will restore fiscal health.

The markets are clearly not so confident.

"While the government continues to stress that it is on course for meeting its deficit reduction targets, pressure is rising for Portugal to accept a bailout now in order to stop the market fretting about the liabilities of Spain towards Portugal," said Jane Foley, an analyst at Rabobank International.

"Clearly, eurozone officials have a battle on their hands to contain contagion and restore confidence in the euro," said Foley.

As if Europe's debt crisis wasn't enough, tensions on the Korean peninsula ratcheted up again after fresh artillery fire was heard hours after North Korea warned it was on the brink of war.

The current bout of unease started on Tuesday when four South Koreans were killed after North Korea unleashed a brief hail of artillery against the small South Korean island of Yeonpyeong.

"Korean tensions continue to weigh on market sentiment generally and restrains the upside in equity markets for the time being," said Neil MacKinnon, global macro strategist at VTB Capital.

Earlier in Asia, Japan's Nikkei 225 stock average closed down 0.4 percent to close at 10,039.56 and South Korea's Kospi fell 1.3 percent to 1,901.80.

Hong Kong's Hang Seng shed 0.8 percent to 22,877.25. Australia's S&P/ASX 200 bucked the trend, adding 0.1 percent to 4,598.30.

Meanwhile, Chinese shares fell in weak trading amid worries over tightening of monetary policy. The benchmark Shanghai Composite Index lost or 0.9 percent to 2,871.70. The Shenzhen Composite Index for China's smaller, second exchange edged 0.4 percent lower to 1,332.90.

In the oil markets, benchmark oil for January delivery was down 62 cents to $83.24 a barrel in electronic trading on the New York Mercantile Exchange.

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Associated Press writer Pamela Sampson in Bangkok contributed to this report.