Major stock markets fell and the euro tumbled from multi-month highs against the dollar and yen as political uncertainty in Spain and Italy revived worries that the steps taken to rein in the euro zone debt crisis could unravel.

The MSCI's world equity index fell 1 per cent and was on track for its worst day since November. European stocks posted their lowest close of the year, as shares in Spain and Italy tumbled.

Spanish 10-year bond yields climbed to six-week highs after Prime Minister Mariano Rajoy faced calls to resign over a corruption scandal involving allegations in the media that he received payments from a slush fund. Mr Rajoy denies any wrongdoing.

"The prospect of Rajoy's resignation has roiled the markets," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. "Any fresh political instability in (the) euro zone's most important periphery economy could undermine the sense of investor confidence and send Spanish yields higher, making it much more difficult for the government to implement its austerity measures."

In Italy, former Prime Minister Silvio Berlusconi, one of the top candidates in this month's general election, is seeing a resurgence in popularity, which threatens the reforms implemented by the outgoing technocrat government.

The FTSEurofirst 300 ended down 1.47 per cent at 1150.91 points, its lowest close since December 31. It had hit a near two-year peak of 1178.55 points in late January.

Spain's IBEX fell 3.8 percent, and Italy's FTSE MIB shed 4.5 per cent.

In New York, US stocks retreated in midday trading on Monday after a dramatic surge on Friday that took the Dow Jones Industrial Average above 14,000 points.

The Dow was down 0.98 per cent, while the broad-based S&P 500 also fell by 0.98 per cent and the tech-heavy Nasdaq Composite Index was off by 1.34 per cent.

 

Euro retreats before ECB

Spanish 10-year government bond yields rose as much as 24 basis points on the day to 5.45 per cent, their highest level since mid-December, while Italian yields jumped 15 basis points to 4.48 per cent.

The euro traded at $US1.3530, down 0.8 per cent. It had risen to $US1.3711 on Friday, a level unseen since late 2011.

But the euro's dip may prove temporary, strategists said, and it could resume its move up if the European Central Bank, which is to hold a policy meeting on Thursday, expresses no concern about the currency's recent gains.

Against the yen, the euro was down 1.2 per cent at ¥125.25 yen , off a 33-month high of ¥126.96 n struck last week.

The dollar fell 0.2 per cent to ¥92.57.

In commodities trading, Brent oil fell to a low of $115.54 per barrel before recovering slightly to around $115.99, down 77 cents. Brent had risen for three straight weeks. US crude dropped $US1.12 to a low of $96.65 per barrel after rising for eight consecutive weeks, the longest such winning streak since July-August 2004.

Oil prices had rallied in recent weeks on signs of an improving global economic outlook and geopolitical tensions in the Middle East.

"The market is long due a correction," VTB Capital oil and commodities markets strategist Andrey Kryuchenkov said. "The market is firmly in an uptrend, but so over-bought." Spot gold rose 0.5 per cent to $US1675.39 an ounce.

US Treasuries prices rose as bargain-minded investors emerged and pushed benchmark yields below 2 percent after climbing overnight to their highest levels in over nine months. The benchmark 10-year U.S. Treasury note was up 14/32, the yield at 1.9745 percent.

Overnight, Asian shares climbed to 18-month highs. China added to the optimism about the global economy by reporting on Sunday that its services sector had grown for a fourth straight month in January, although the slim gain signaled that the global recovery under way is a modest one.

Bloomberg, AFP