Spain tumbled into recession and European stock markets and the euro fell Thursday as Greece installed a crisis government to tackle its crippling debt, European Union leaders prepared for talks and analysts raised the spectre of a run on euro-zone banks.
Heavy withdrawals of deposits have been reported in Greece and Spain, and top European Union leaders were to hold a video conference later in the day.
They were initially to discuss an upcoming G8 meeting of industrialized countries but were now faced with a serious deterioration of the situations in Greece and elsewhere across the euro-zone.
A caretaker government took office in Athens on Thursday to organize its second election in six weeks after an inconclusive May 6 vote as fears over its possible euro exit rocked Spain and Italy.
The election left Greece in limbo and the new poll on June 17 offers no guarantee of a viable government able to implement an EU-IMF bailout which has divided the country.
Meanwhile, Europe's single currency nosedived to a four-month low at $1.2667 U.S.
The ECB said Wednesday that it was no longer dealing with some Greek banks via the conventional credit window, Dow Jones Newswires reported, and has restricted the banks to "emergency lending assistance" from Greece's central bank that must be approved from month to month.
British Prime Minister David Cameron was to discuss the crisis with German Chancellor Angela Merkel, new French President Francois Hollande, Italian Prime Minister Mario Monti and top E.U. officials.
Their video conference was originally called to discuss a G8 meeting in the United States at the weekend, but Cameron's office acknowledged that the euro-zone was likely to come up as well.
On Thursday, Cameron renewed his call for euro-zone leaders to take decisive action or face the break up of the single currency.
Britain is not a euro-zone member but the bloc is a key trading partner and fallout from the debt crisis is having a serious effect on the entire 27-member European Union.
Those risks were underscored in Madrid, where the national statistics institute INE said the fourth biggest eurozone economy had contracted by 0.3% in the first quarter of 2012.
That was the same decline seen in the last three months of 2011 and confirmed that Spain was officially in recession, defined as two straight quarters of economic contraction.
Italy, the third biggest euro-zone economy, is also in recession, while number two France has only narrowly escaped a similar fate.
The Spanish government paid higher rates to place three- and four-year bonds with wary investors Thursday, while a state-controlled bank, Bankia, was reportedly hit by heavy withdrawals by clients, a dire situation seen also in Greece this week.
Germany's benchmark 10-year bond saw its own rate reach a new record low of 1.420% as investors fled to financial safe-havens.
Shares in Bankia, which was created in 2010 from a merger of seven savings banks, dropped by 9.79% to 1.493 euros in afternoon trading, while the Ibex-35 index of leading shares was off by 1.59% overall.
