European shares hit by fears EU summit will not deliver

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Spanish and Italian shares have fallen sharply amid fears that an EU summit this week will again fail to produce a deal to shore up the euro.

Their main indexes closed down about 4% as the Spanish prime minister called for Thursday's European Union summit to "dispel doubts" about the euro.

Wall Street was also unnerved by the continuing crisis and the Dow Jones ended with a loss of 1.1%.

Earlier Spain formally requested a bailout loan for its banking sector.

Eurozone countries have agreed to lend up to 100bn euros ($125bn; £80bn) to Spain's banks.

No specific figures were given for the emergency loans, although independent audits last week said that the banks would need up to 62bn euros to stabilise themselves.

The falls in Spanish stocks were mirrored across Europe with France's Cac 40 down 2.2%, Germany's Dax down 1.9% and Italy's Mib down 4%.

The falls were exacerbated by a Reuters report that Moody's was planning to downgrade Spanish banks.

Cyprus bailout

In another sign of the scale of the problems facing Europe, Cyprus has formally requested financial assistance from European authorities.

"The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill over effects through its financial sector, due to its large exposure in the Greek economy," a government statement said.

Cyprus' three largest banks - Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank - are heavily exposed to Greece.

Cyprus' request comes after its credit rating was cut to junk status by Fitch.

Cyprus' junk credit rating means it is almost impossible for it to borrow money from international markets, as it makes it too expensive for it to do so.

EU Summit

Start Quote

Even assuming that Greece remains in the eurozone, Cypriot banks will have to bear significant further loan losses”

End Quote Fitch on Cyprus downgrade

Fears are building that this week's two-day European Union summit could prove inconclusive.

"We must dispel doubts over the eurozone," said Spain's prime minister Mariano Rajoy.

"The single currency is, must be, irreversible," he said.

In addition, an auditor's visit scheduled for debt-stricken Greece has had to be postponed after both the Greek prime minister and incoming finance minister were affected by health problems.

A spokesman for German Chancellor Angela Merkel said the delay meant no decision would be taken on Greece at the summit.

"Do not expect any decision on Greece at the European council," said Steffen Seibert.

Meanwhile, in another indication of the conflicts between European nations on the best way forward, Angela Merkel reiterated her opposition to calls to pool eurozone debt.

"There has to be a balance between guarantees and controls," she said.

IG Index analyst Chris Beauchamp blamed Chancellor Merkel's reluctance to share liability for eurozone debts for the share price falls.

"This was, is and will remain the fundamental issue in the crisis - Germany is understandably not keen on taking on the burden of debts built up by (as it sees it) spendthrift countries," he said.

Start Quote

On difficult areas like banking union, officials are making more progress than anyone would have expected a month or two ago. But the Germans have succeeded in dramatically lowering expectations for what could be achieved by Friday.”

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Banking union

The problems facing Europe's banks will be on the agenda at the summit of European leaders on 28 and 29 June.

The BBC's economics editor Stephanie Flanders said: "On difficult areas like banking union, officials are making more progress than anyone would have expected a month or two ago.

"But the Germans have succeeded in dramatically lowering expectations for what could be achieved by Friday."

Draft documents prepared for the meeting, which have been reported by news agencies, detail proposals for a single European banking supervisor and a common scheme for guaranteeing bank deposits.

There would also be a central fund to wind down bad banks.

Options for the regulator include having one body, possibly the European Central Bank, to oversee the continent's biggest banks, while another watchdog supervises the day-to-day operations of all the banks.

The proposals also include closer fiscal union, with the prospect of eurozone countries sharing debt raised again.

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