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LONDON, Feb 4 AFP

February 05 2013, 05:02AM

European stock markets have plunged and the euro has dropped against the US dollar amid fears of political turmoil in Spain and Italy, with banking shares suffering some of the heaviest losses.

London's FTSE 100 index of top companies fell by 1.58 per cent on Monday to close at 6246.84 points.

Frankfurt's DAX slumped 2.49 per cent to 7638.23 points and Paris's CAC shed 3.01 per cent to 3659.91 points, its sharpest fall since mid 2012.

Madrid's IBEX 35 gave up by 3.77 per cent in value to 7919.6 points, while Milan's FTSE-Mib nosedived 4.50 per cent to 16,539 points.

Markets were jolted after Spanish Prime Minister Mariano Rajoy was pressured to resign amid a growing corruption scandal, while in Italy, the party of former prime minister Silvio Berlusconi showed solid gains in polls ahead of national elections later this month.

Spain's centre-left newspaper El Pais published account ledgers purportedly showing that donations were channelled into secret payments to Rajoy and other top party officials.

Rajoy has dismissed the ledgers as false and has vehemently denies receiving any payments.

"The latest scandal in Spain will continue to unfold over the coming days, placing considerable pressure on the government's bond yields," ETX Capital analyst Ishaq Siddiqi noted.

The rate of return on Spanish government 10-year bonds jumped to 5.438 per cent in trading on the secondary market, from 5.208 per cent on Friday.

Italian 10-year government bond rates rose to 4.468 per cent from 4.329 per cent, while benchmark German Bunds fell to 1.612 per cent from 1.672 per cent, a sign that investors were looking again for a safe haven.

"The tensions in Spain and Italy explain the market losses today," summed up Renaud Murail, a broker at Barclays in Paris.

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.

In Spain, data released Monday showed that the number of Spaniards officially registered as unemployed rose to 4.98 million in January.

Amid the resurgence in eurozone strains, the European single currency slid to $US1.3540 from $US1.3637 on Friday, when the euro had reached a 14-month high at $US1.3711.

Gold prices fell to $US1666 ($A1606.02) an ounce from $US1669 on the London Bullion Market last Friday.

A breakdown of the stock losses showed that banks were on the front line, with Santander, the biggest eurozone bank by market capitalisation, shedding 5.7 per cent to 5.691 euros in Madrid, while Italian peer UniCredit lost 8.29 per cent to 4.25 euros in Milan.

Royal Bank of Scotland was down by 3.49 per cent to 328.6 pence in London and Barclays off by 2.83 per cent at 291.5 pence.

Finance Minister George Osborne warned during the day that British banks will be broken up if they fail to radically reform by ring-fencing retail operations from their investment arms to avoid any more state bailouts.

In Frankfurt, Commerzbank stock plunged by 5.90 per cent to 1.52 euros after Germany's second-biggest bank said that its full-year net profit tumbled to just 6.0 million euros ($A7.91 million) in 2012 after heavy writedowns pushed it into the red in the fourth quarter.

BNP Paribas was off by 4.41 per cent at 44.70 euros in Paris, and Credit Agricole gave up 5.42 per cent to 7.12 euros to post the biggest loss among CAC 40 stocks.

Asian stock markets had ended mixed on Monday on profit-taking after gains fuelled by the upbeat jobs data out of the United States before the weekend, traders said.

Tokyo closed 0.62 per cent higher to hit a 33-month high at 11,260.35 points, while Seoul slipped 0.23 per cent and Sydney fell 0.28 per cent.