Stock markets fall on fears eurozone debts may spread

The declines came after European stock markets fell heavily on Monday, especially in Italy, where the market in Milan lost 4%.

Eurozone finance ministers said they were ready to pass new measures to stop the crisis spreading. The concern is that Italy and Spain may have to follow Greece, Portugal and the Republic of Ireland and seek a European Union and International Monetary Fund (IMF) bail-out.

Eurozone finance ministers said increased efforts to "improve the euro area's systemic capacity to resist contagion risk" would include "enhancing the flexibility and the scope" of the European Financial Stability Facility (EFSF).

This is the bail-out fund to which eurozone member states contribute.

Finance ministers also agreed to look at lowering the interest rates that Greece, Portugal and the Irish Republic have to pay, plus lengthening the maturities of their loans.

"Ministers reaffirmed their absolute commitment to safeguard financial stability in the euro area," the finance ministers said in a statement after eight hours of talks in Brussels.

Eurozone finance ministers also discussed how, and by how much, banks and other financial institutions could contribute to a new rescue package for Greece.

However, no final decision was reached on this, as it also has to be agreed with the IMF.

Speaking from Washington, IMF managing director Christine Lagarde said it was not yet ready to discuss terms for a second Greek bail-out. "Nothing should be taken for granted," she said.

Meanwhile, Greece's Prime Minister, George Papandreou, called for a comprehensive solution to his country's debt problems. "I thus believe it is time now to address our fundamental problems head on and produce a comprehensive package of solutions that clearly signals our determination not to see the European project further damaged or destroyed," Papandreou said in a letter to Jean-Claude Juncker, chairman of the eurogroup of finance ministers.

Concern that Italy could be the next country to require a financial bail-out comes as its government is moving ahead with plans for an austerity budget to reduce its public deficit.

Italy's Finance Minister Giulio Tremonti has proposed €48 billion in budget cuts over three years and aims to cut the deficit to zero by 2014 from this year's 3.9% of gross domestic product.

However, financial markets were unsettled by remarks from Prime Minister Silvio Berlusconi, who indicated in a newspaper interview that the austerity plan might not have full cabinet support.

In a sign that investors are growing more risk averse, the yield on Italian 10-year bonds on Monday jumped to 5.6% from 5.3%. Meanwhile, yields on 10-year bonds issued by the Spanish Government rose to 5.9%, from 5.7%.

The euro was also lower, falling in early Tuesday trading to a four-month low against the dollar at $1.3958.

Analyst Jean-Francois Robin of French investment bank Natixis said: "We find ourselves at one of the worst moments of the European monetary crisis.

"The idea of a contagion from the Greek crisis to other eurozone countries like Italy and Spain is gaining ground."