The rise in Italian and Spanish bond yields has reached an alarming level that underlines the "dangerous" situation into which the euro region has sunk, Finnish prime minister Jyrki Katainen said.

Borrowing costs on debt sold by the euro area's third- and fourth-largest economies are "extremely worrying and scary," Katainen said today in an interview with Helsinki-based broadcaster YLE.

"A serious banking crisis and an ensuing recession are likely in Europe if we don't have the courage or ability to make decisions to prevent them."

European leaders have failed to halt market speculation that Italy may need to resort to a bailout similar to the ones keeping Greece, Ireland and Portugal afloat.

In Italy, the country's austerity package won't put an end to debt risks, Standard and Poor's said last month. Moody's Investors Service last week said it may cut Spain's Aa2 rating amid "continued funding pressures."

Yields on the 10-year debt of both countries touched records today and have traded above 6 per cent all week.

The yield on Spain's 10-year bond rose as much as 14 basis points earlier today, before trading little changed at 6.28 per cent as of 8.36am in London. The rate Italy's similar- maturity note jumped as high as 6.26 per cent earlier today, before trading less than one basis point higher at 6.14 per cent.

Political wrangling in the US to raise the country's debt ceiling "added uncertainty in the world economy, which was a partial cause to the increased yields for Italy and Spain," Mr Katainen said.

The Senate voted yesterday to raise the US debt ceiling, currently $14.3 trillion. The government will also reduce spending by $2.4 trillion or more. Moody's said yesterday the outlook for the world's biggest economy's credit rating is negative, even as it reiterated its AAA rating.

Bloomberg