World stocks fell sharply, the euro hit a 12-year low versus the yen and Spanish borrowing costs struck record highs Monday on speculation Spain could soon require a full state bailout, traders said.

"There are fears that Spain is edging closer to being forced to seek a full scale bailout, having secured 100 billion euros ($121 billion) to help recapitalise its banks," said Joshua Raymond, chief market strategist at City Index traders.

All eyes were also on bailed-out Greece, with auditors from the European Union, International Monetary Fund and the European Central Bank due in Athens this week for another inspection of the new government's economic programme.

The report will determine whether Greece will receive fresh loans of 31.5 billion euros by September due under its debt rescue programme.

German Finance Minister Wolfgang Schaeuble warned Greece in a newspaper interview Monday that it must redouble efforts to comply with bailout conditions imposed by international creditors.

"If there were delays, Greece must make up for them," he told the daily Bild.

London's FTSE 100 benchmark index of leading shares dropped 1.61 per cent at 5,560.69 points nearing midday. Frankfurt's DAX 30 index shed 1.40 per cent to 6,537.16 points and in Paris the CAC 40 slid 1.69 per cent to 3,139.74 points.

Madrid's IBEX 35 index plunged more than 5.0 per cent and Athens dived over 6.0 per cent.

"After a pretty week of inspiring corporate results, investors are again looking at the markets through the lenses of the euro crisis," said Anita Paluch, a trader at Gekko Global Markets.

In foreign exchange deals, the European single currency fell to a six-week low at $1.2082. It later stood at $1.2102, compared with $1.2152 in New York late Friday.

The euro also slumped to its lowest level against Japan's safe-haven currency in almost 12 years -- hitting 94.24 yen.

"The traditional safe haven currencies of the yen and US dollar have strengthened overnight reflecting heightened investor concern over the escalating eurozone sovereign debt crisis," said Lee Hardman, currency analyst at The Bank of Tokyo-Mitsubishi UFJ in London.

Spanish long-term borrowing costs jumped to record highs on Monday as investors turned increasingly sceptical about government efforts to stabilise a stricken banking system and the public finances.

The yield -- the rate of return -- on the benchmark Spanish 10-year government bond jumped to 7.466 per cent from 7.225 per cent on Friday, well above the 7.0 per cent danger level for long-term funding.

"Investors fear that the eurozone's fourth largest economy is soon to follow Greece, Ireland, and Portugal in requesting emergency funding, with yields on ten-year debt fast approaching 7.5 per cent," said Spreadex trader David White.

"Stock markets around the world are feeling the chill of Spain's developing crisis, and stocks trading in Asia ... were no exception."

With borrowing costs hitting the danger levels that forced Ireland, Greece and Portugal to seek a bailout, investors are concerned that Spain, one of the eurozone's biggest economies, will also have to call in help.

Spain's economic slump meanwhile deepened in the second quarter of 2012 as consumers cut back spending, the bank of Spain said Monday.

Gross domestic product shrank 0.4 per cent in the second quarter from the previous three months, after contracting 0.3 per cent in the first, the central bank said in its latest monthly bulletin.

In Asian trade, Hong Kong led the losses by closing down 2.99 per cent. Tokyo shed 1.86 per cent, Seoul lost 1.84 per cent and Sydney dropped 1.67 per cent.

Market players were spooked after one of Spain's indebted regions, Valencia, said it would ask the central government for financial support, while officials in Madrid warned that the economy would likely contract through 2013.

Reports that Murcia would also seek help were rejected.

"Europe is definitely a drag on risk assets again this week as investors are worried that Spain's debt burden could be bigger than expected and that a full bailout may be required," said Peter Esho at City Index in Australia.

European leaders on Friday agreed to grant Spain's banks bailout cash of up to 100 billion euros but despite this there are fears that the country would need extra cash to help service its debts.

The soaring yields on 10-year bonds come as unemployment sits at 24 per cent and the government tries to implement further austerity measures.

Without better economic news the country could lose access to debt markets, leading it to a bailout, which some analysts have said could cost up to $500 billion.

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