Spain's debt yields broke above 6% on Monday as investors worried about its budget, knocking the euro and sending safe-haven German bonds to a record last set at the height of the euro zone crisis.
Signs of slowing global growth also undermined sentiment in commodity markets while European equity markets were mostly in positive territory after sharp falls last week.
Spanish stocks were lower, however, reflecting concerns about the country's ability to finance its deficit and debt with borrowing costs on the rise.
Mixed signals from the European Central Bank (ECB) over its willingness to help the market by restarting a special bond buying programme and news Spanish banks have been heavy borrowers of cheap ECB funds also undermined confidence.
Spain's 10-year bonds were up 16 basis points at 6.15%, five-year yields topped 5%, while two-year yields ES2YT=TWEB spiked to 3.70%, all highs for this year.
Six percent was last reached in December and is psychologically important for markets. The rise typically accelerates after that level, putting yields on course for 7% beyond which debt costs are seen as unsustainable.
The cost of insuring Spanish debt against default also hit record highs in early trading. Spain will auction 12- and 18-month Treasury bills and two-year and 10-year bonds on Thursday.
Contagion fears also pushed Italian 10-year bonds higher.
The euro fell below a key level at $1.30 on the concerns about Spain to hit $1.2995, its lowest in two months, before recovering to be down 0.4% at $1.3010.
German bond prices gained and yields on the benchmark 10-year Bund, viewed as the euro zone's safest debt, hit a record low of 1.628%.
The previous record was set in November last year at the height of the debt crisis, just before the ECB injected around 1 trillion euros of cheap three-year funds into the region's banking system.
EQUITIES CONSOLIDATE
European equity markets were mostly higher in early Monday trading, after seeing sharp falls last week when the concerns over Spain first resurfaced.
The FTSE Eurofirst index of top European shares was up 0.3 points 1,030.69 after closing 1.6% lower on Friday, to post its fourth straight weekly loss. Spain IBEX 35 Index was down 0.45% at 7217.60.
The MSCI global equity index was around 0.3% lower after a selloff sparked by disappointing China growth data which also sent U.S. shares down sharply on Friday.
Oil and metals prices were suffering from the worries about Spain, but were also hit by the signs of slowing demand from China and fears U.S consumer demand was being hurt by high gasoline prices.
The dollar index against a basket of other currencies was up 0.27% on Monday.
The dollar's strength also makes commodities more expensive for consumers using other currencies, putting prices under pressure.
Front-month Brent crude slipped $1.28 to $119.93 a barrel while U.S. crude oil slipped 79 cents to $102.05 a barrel.
Spot gold fell 1% to a one-week low of $1,640.64 an ounce, before recovering slightly.
