By Richard Hubbard
LONDON (Reuters) - Spain's 10-year bond yields hit a euro-era record of 7 percent on Wednesday as investors fled to safe-haven assets on fears the storm surrounding Europe's two-year long debt crisis was worsening, sending European shares and the euro lower.
"The underlying problem of deteriorating confidence in sovereign debt in Europe is continuing to intensify," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.
The euro dipped only 0.1 percent to $1.2573, supported by investors covering already very bearish positions and the fact that many are sidelined by the approach of Sunday's cliffhanger election in Greece, which could see it leave the currency bloc.
The euro has spent the week within a range between a near two-year low set on June 1 of $1.2288 and Monday's three-week high of $1.2672.
"The euro has been relatively stable as we head into the Greek election, and that will dictate market direction next week. Investors do not want to take on extra risk at this point," Hardman said.
Ten-year Spanish bond yields rose 23 basis points to 7.01 percent, above the 7 percent mark that has forced other struggling euro-area nations to seek an international bailout.
The rise follows a three-notch downgrade to Spain's credit rating by Moody's Investors Service late on Wednesday, which took it to within one notch of "junk" status.
Spanish yields have risen sharply this week after euro zone ministers agreed at the weekend on a rescue plan of up to 100 billion euros for the country's banks that has failed to convince investors it solves Spain's financial problems.
Fears that Spain's problems may be repeated on an even larger scale in Italy, Europe's third-largest economy, sent Italian government 10-year bond yields up five basis points to 6.3 percent.
That came as the Italian government's borrowing costs soared at an auction of 4.5 billion euros of new debt.
"We are fast approaching the point where both Spain and Italy may have to be removed from the market," said Gary Jenkins, director of Swordfish Research.
Europe's top shares extended their losses, with Spain's problems adding to fears the worsening euro zone debt crisis was hurting global growth, crimping appetite for riskier assets like equities.
"Till there is more calm around Greece and Spain, one should just stay a bit on the sidelines and watch what will happen," said Heinz-Gerd Sonnenschein, equity markets strategist at Deutsche Postbank, in Germany.
The FTSEurofirst 300 was down 10.4 points, or 1.1 percent, at 976.55, having closed 0.3 percent down on Wednesday.
Gold benefited from rising concerns about the impact of the euro zone crisis, regaining some of its safe-haven allure. Spot gold traded up 0.2 percent to about $1,620 an ounce, having already gained over 1 percent this week.
The turmoil in the euro zone, however, did not prompt the Swiss National Bank to change its cap on the franc of 1.20 per euro at its latest policy meeting.
The SNB said it remained ready to buy an unlimited quantity of Swiss francs to defend that level, despite having to buy large amounts of euros in the past few weeks as the crisis encouraged investors to flee the euro zone.
(Reporting by Richard Hubbard; Editing by Will Waterman)