European stock markets suffered further big drops this evening, mainly due to renewed worries about the euro zone debt crisis.

Frankfurt's DAX closed down more than 5%, while Paris fell almost 4% and London 3.6%. Wall Street markets were closed for a holiday. Fears about the effect of the euro zone crisis on banks' holdings of government debt sent their shares sharply lower. Deutsche Bank dropped almost 9% in Frankfurt, while in London, RBS fell 12%.

The euro zone faces a week packed with political and legal risks, beginning with a German constitutional court ruling on Wednesday on claims that Berlin is breaking German law and European treaties by contributing to bail-outs for Greece, Ireland and Portugal.

The court is not expected to rule against the contributions, but may add stipulations for dealing with future requests that will complicate bail-out plans.

As pressure mounted on Italy to get its fiscal house in order, Italian 10-year yields rose to 5.59% this evening. Recent buying by the European Central Bank had pushed them down to the 5% level.

Earlier, European Central Bank chief Jean-Claude Trichet called for urgent application of the latest debt rescue measures for Greece.

Trichet also spoke of an "absolutely imperative" need to tighten up the monitoring of economies in the euro zone, in a speech against a background of renewed concern over the Greek and wider euro zone debt crisis.

Speaking in Paris, the ECB chief said that EU and national legislation for much tighter monitoring of national budgets, due to be adopted within "a few days" was "clearly absolutely imperative".

He also said it was urgent to apply the EU decisions taken on July 21 to provide Greece with a second debt rescue. "There also we have an immediate and imperative need for all of the decisions to be enacted," he told the Institut Montaigne.

On Friday, an audit mission from the EU, ECB and International Monetary Fund cut short its latest study of Greek finances, on which depends the next release of money from the first rescue, saying that Greece had more work to do on its crash programme to reduce the public deficit.

ECB upped government bond buys last week

European Central Bank figures show that it increased its bond buys to €13.3 billion last week, when it bought Italian government debt to support an auction in Italy that nonetheless met weak demand.

The rise in purchases from €6.65 billion in the previous week was more than expected and reflected the ECB's efforts to hold down bonds yields in Italy, whose strained public finances have fuelled market pressure on its borrowing costs.

The ECB reactivated the bond-buying plan after a 19-week pause last month when Italy and Spain came closer to succumbing to the euro zone debt crisis after a fierce market attack.

The bank resumed the purchases despite opposition from a four-man group on its policymaking Governing Council, led by Germans Jens Weidmann and Juergen Stark.

Mario Draghi, who will succeed Jean-Claude Trichet as ECB president in November, warned governments today they should not assume the purchases operations will continue indefinitely.

Barroso doesn't expect European recession

European Commission chief Jose Manuel Barroso today said he did not expect Europe to slide into recession, calling the European Union and the euro 'strong and resilient'.

On his first official visit to Australia, Barroso also stressed the need to strengthen the international monetary system and continue financial regulatory reform to help prevent any further economic crisis.

'We don't anticipate a recession in Europe. The latest forecast by the European Commission shows there will be growth, modest growth it is true,' he said during a joint press conference with Prime Minister Julia Gillard.

Rating agency Standard and Poor's said last week that a second quarter slowdown had increased the risk of a double dip recession in Europe, but that the region should escape with sluggish growth this year.

'Great and good' group calls for eurobonds

A panel of European former leaders and top global economists has issued a rallying cry for the euro zone to issue joint eurobonds and leap towards federalism as the way out of its debt crisis.

The panel, chaired by Nicolas Berggruen, the billionaire son of a famed German-Jewish art collector, included former German chancellor Gerhard Schroeder, Spanish prime minister Felipe Gonzalez and Finnish prime minister Matti Vanhanen, as well as Nobel Prize-winning economists Nouriel Roubini and Joseph Stiglitz.

"The euro zone needs to decide whether it will move in the direction of a more comprehensive fiscal and economic union or risk a break-up that would put in danger the whole European integration," said a statement issued by the self-appointed Council for the Future of Europe at a Brussels press conference.

The group, which also includes ex-British premier Tony Blair, set out their vision to get round any future repeat of the smouldering crisis first triggered some 18 months ago when the extent of Greece's colossal debt emerged.

They recommended an "expanded" rescue fund, "properly capitalised" banks and a mechanism for "orderly debt resolution" not only for private companies but also governments "if lasting and unmanageable insolvencies arise."

"A common European debt facility, Eurobonds, should be developed," they said, echoing a growing shift among analysts and some politicians for mutualised euro zone government borrowings. This idea has been ruled out for the foreseeable future by German Chancellor Angela Merkel and French President Nicolas Sarkozy.