Portugal's financial crisis has reignited, triggering a stock market plunge and once again raising the spectre that its borrowing costs could soon become unsustainable.
Share prices plummeted 6% in early trading on Wednesday and other major stock markets, including the FTSE 100, also fell sharply.
Investors were reacting to growing political turmoil after Foreign Minister Paulo Portas resigned on Tuesday night, a day after the shock departure of Finance Minister Vitor Gaspar amid growing unrest against austerity.
Prime Minister Pedro Passos Coelho has defied calls to follow suit but the resignations at the top of the centre-right government have left deep concerns over not only the coalition's future but Portugal's ability to pursue the steep savings, demanded by creditors, in return for continued bailout support.
There has been a fierce public backlash against the austerity drive, in what is one of the poorest countries that uses the euro.
Values correct at 09:24 BST But unease among investors about whether that tough savings programme will continue has forced up the country's borrowing costs too on bond markets.
The yield - the percentage Portugal pays to service its debts - on the country's benchmark 10-year bond spiked just below 8% on Wednesday.
A 10-year borrowing rate of about 8% is widely considered unsustainable.
Spanish and Italian yields jumped too while nervousness over the state of Greece's next tranche of bailout money also caused jitters on stock markets as well.
"With disorder and uncertainty over the political situation in Egypt threatening stability in the Middle East, and a Greek deadline looming to prove it can action its bailout conditions before receiving the next tranche of aid, volatility is likely to be high," Mark Ward, head of trading at Sanlam Securities, said.
Jose Manuel Barroso is monitoring developments with "concern" The President of the European Commission, Jose Manuel Barroso admitted the situation in Portugal was a worry.
He said: "The initial reaction of the markets shows the obvious risk that the financial credibility recently built up by Portugal could be jeopardised by the current political instability.
"If this happens it would be especially damaging for the Portuguese people, particularly as there were already preliminary signs of economic recovery.
This delicate situation requires a great sense of responsibility from all political forces and leaders. The situation should be clarified as soon as possible."
He concluded: "We trust that Portuguese democracy will deliver a solution ensuring that the sacrifices the Portuguese people have made until now will not have been in vain."
The falls in European stocks took place after Asian markets dropped overnight after official figures showed that growth in China's services sector sagged to its weakest pace in nine months in June, adding to signs of a slowdown in the world's second-largest economy.
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