Spanish stocks drop to new lows on fears of French contagion

After an opening rally, Spanish stocks on Wednesday plunged for a ninth day in a row, setting a new annual low, following the news that French President Nicolas Sarkozy is prepared to announce a package of austerity measures and after speculation that France stands to lose its AAA rating.

The blue-chip Ibex 35 dropped 5.49 percent, losing 462.90 points, after early gains at the opening of the day's trading. The bourse closed at 7,966 points, the sharpest drop since May 2010. "Despite seeing some small gains in the morning thanks to Wall Street's rally yesterday [Tuesday], with so much uncertainty around, if the markets look for a reason to drop they will find it," said Soledad Pellón, an analyst at IG Markets.

Spanish bank Banco Santander - a traditional strong performer - was the biggest loser following Wednesday's session with a 8.33-percent drop.

The bank was followed by Gamesa and Abengoa, which closed with 8.09 percent and 7.87 falls, respectively. BBVA also lost 7.83 percent, followed by Repsol, 5.72 percent; Telefónica, 5.69 percent; and Iberdrola, 5.16 percent.

Spain's risk premium closed at 279.7 basis points above the benchmark German bund.

Markets across Europe were also dragged down by news coming from Washington that the Federal Reserve would leave the prime interest rate at near-zero levels until mid-2013.

But the biggest concern affecting the bourses was speculation that contagion in the euro zone could spread to France. Sarkozy has cut short his summer vacation to return to Paris to deal with the crisis.