LONDON -- Stocks took a battering while the euro slid to a two-year low against the dollar on Monday as fears over Europe's debt crisis returned to haunt markets.

Spain is the epicenter of the current bout of fears, with investors increasingly concerned that the country will not be able to turn its public finances around without outside help. Greece remains in the spotlight with investors increasingly skeptical about its future within the 17-country eurozone.

The catalyst to the day's dramatic falls was the sharp increase in the yield on Spain's benchmark 10-year bond to well above 7 percent. If it remains around that level, investors believe the eurozone's fourth-largest economy will likely need a financial rescue like Greece, Ireland and Portugal.

Spain's 10-year borrowing rate rose 0.23 percentage points Monday to 7.45 percent - its highest level since the euro was established in 1999.

"Those levels indicate that Spain may soon struggle to fund itself in the market and therefore unless some positive action is taken the country will need a full bailout," said Gary Jenkins, managing director of Swordfish Research.

Coupled with worries that the financial firewall Europe has built up to deal with its debt crisis is insufficient and growing concerns of the financial health of regions within Spain, markets have started the week on a sour note.

In Europe, the FTSE 100 index of leading British shares was down 2.2 percent at 5,530 while Germany's DAX fell 3.4 percent to 6,402. The CAC-40 in France was 2.9 percent lower at 3,102.

While markets were tanking, Spain and Italy announced temporary bans on the short-selling of stocks - whereby investors are prohibited from selling stocks they don't already own.

The decision by the Spanish regulator to ban the practice for three months helped contain the fallout on the Madrid exchange but did little to encourage traders elsewhere. Italy's FTSE MIB also retraced losses after the country's regulator reintroduced a ban on the short-selling of financial stocks for this week.

Madrid's IBEX was down 2.1 percent and Milan's FTSE MIB 3 percent lower.

Andrew Wilkinson, chief economic strategist at Miller Tabak & Co., said the price action across Europe since the Spanish ban was announced indicates that some investors were caught on the hop, and specifically had to unwind certain German positions in response.

"The DAX fell by a further 1.7 percent from its position at the time of the announcement," Wilkinson said.

Though Spain is at the forefront of concerns at the moment, investors are worried that Italy will also struggle with its debts. Its 10-year yield was up 0.28 percentage points to 6.35 percent.

The wave of selling was not just confined to Europe. In the U.S., the Dow Jones industrial average was down 1.6 percent at 12,615 while the broader S&P 500 index fell 1.7 percent to 1,340.

The euro was also under pressure, trading 0.5 percent lower at $1.2091. Earlier it had fallen to $1.2066, its lowest level since June 2010. The euro has also fallen to a near 12-year low against the yen.

A forecast from a Chinese central bank adviser that China's economy could wane further in the third quarter also deepened concerns about the global slowdown. China's economic growth slowed to a three-year low of 7.6 percent in the second quarter.

Japan's Nikkei fell 1.9 percent to 8,508.32 and Hong Kong's Hang Seng dived 3 percent to 19,053.47. China's Shanghai Composite Index shed 1.3 percent to 2,141.40. South Korea's Kospi dropped 1.8 percent to 1,789.44.

Oil prices took a hit, too, as investors fretted over Europe's debt woes and the global economy, with the benchmark New York rate down $3.45 a barrel at $88.38.