European stock markets fell sharply again after the latest economic figures from the US added to mounting concerns about its recovery.

Shares, which had already been affected by fears that the eurozone debt crisis was spreading to Spain and Italy, were further hit by figures showing that growth in the important US services sector slowed last month.

London's FTSE closed down 2.3% at 5,585. In Frankfurt, the DAX fell 2.3% to 6,641, while in Paris the CAC dropped 1.9% to 3,455. In Dublin, the ISEQ index finished down 2.6% at 2,639.

However, US stocks closed higher. The Dow Jones Industrial Average ended an eight-day losing streak and markets regained some ground lost during yesterday's sell-off.

The S&P 500 climbed 0.51% to 1,260, while the Nasdaq Composite rallied 0.91% to stand at 2,693.59.

This morning, the interest rate demanded by investors to lend money to Spain over ten years hit record highs.

Both Spain and Italy are approaching levels where they simply would not be able to afford to borrow and would require external assistance.

Meanwhile, Italian Prime Minister Silvio Berlusconi addressed parliament this afternoon, insisting that Italy had solid economic fundamentals.

In a speech aimed at soothing concerns over a possible debt crisis, Mr Berlusconi said Italian banks had liquidity and were solvent.

'Our country has a solid political system which has shown itself able to approve in only three days a manoeuvre of almost 80 billion euros.'

EU Commission President Jose Manuel Barroso moved to soothe financial markets and ease 'unwarranted' pressure on both Italy and Spain.

Meanwhile, Spanish Prime Minister Jose Luis Rodriguez Zapatero has cut short his holidays and Italian Finance minister Giulio Tremonti has travelled to Luxembourg for emergency talks with eurozone chief Jean-Claude Juncker.

Germany has sought to play down the turmoil, with government spokesman Christoph Steegmans saying 'there is no reason to fret'.

He said market movements were 'amplified' because summer trading was at a low level - he said Berlin was confident reforms put in place by Rome and Madrid would convince the markets.