European stocks slump as Portugal rocked by crisis

European stock markets fell sharply on Wednesday, with shares in Portugal collapsing by almost seven percent as the debt-plagued nation was gripped by a political crisis.

In afternoon trade, Lisbon's key PSI 20 index of leading shares plunged 5.45 percent to 5,168.20 points, following the resignation of two ministers over austerity policies.

In neighbouring Spain, Madrid's IBEX 35 index nosedived more than three percent before recovering some ground to a 1.81-percent fall to 7,743.80 points.

London's FTSE 100 lost 1.44 percent to 6,213.03 points, Frankfurt's DAX 30 slid 1.36 percent to 7,803.27 points and in Paris the CAC 40 shed 1.26 percent to 3,695.56 points.

In foreign exchange deals, the euro fell to $1.2923 -- hitting a low last seen on May 29. It later recovered to $1.2973 compared with $1.2978 late in New York on Tuesday.

Markets were rocked after Portugal's foreign minister Paulo Portas resigned on Tuesday evening, even though his decision was not accepted by the prime minister.

This shock to the coalition government came one day after the sudden departure of finance minister Vitor Gaspar.

Concerns about Greece have also returned as creditors pushed its leaders to implement huge cuts agreed as part of a bailout, fuelling fears Athens could be denied much-needed cash.

The political crisis in recession-wracked Portugal spread concern in world markets of a new wave of instability from the bailed-out nation on the eurozone's debt-laden periphery.

The yield on benchmark 10-year Portuguese government bonds spiked above eight percent for the first time since November 2012, hitting 8.023 percent before easing a little. It had closed at 6.720 percent the previous day.

A 10-year borrowing rate of about 8.0 percent is widely considered unsustainable for a country such as Portugal.

"Political turmoil in Portugal pushes the country's 10-year bond yields to climb to 8.0 percent for the first time since November 27," said ETX Capital trader Ishaq Siddiqi.

"Two high profile ministers resigned from Portugal's government over the past two days, triggering worries of instability within the government; and today, there are reports that more ministers are expected to step down as the country struggles to stay on top of its austerity plan."

He added that the news would push the focus onto Thursday's interest rate gathering of the European Central Bank, and the subsequent press conference by its chief Mario Draghi.

"In light of these developments, the ECB's policy meeting tomorrow in that case will be this week's show stealer as the pressure is on Draghi to respond to the state of affairs in Portugal's crumbling government," added Siddiqi.

Adding to jitters were renewed concerns over the Chinese economy in the wake of downbeat data on the nation's services sector.

Asian equity markets meanwhile fell on Wednesday.

Hong Kong stocks tumbled 2.48 percent, Tokyo fell 0.31 percent and Shanghai was off 0.61 percent.

Global markets had enjoyed a broad uptick in the past few sessions as concerns over the US Federal Reserve's stimulus programme have eased, while US and European data have pointed to gradual improvement.

However, traders remain edgy ahead of US non-farm jobs data due on Friday, which will give a better idea of the state of the world's biggest economy.

In the US, Wall Street took turbulence in Europe mostly in stride, with the Dow Jones Industrial Average dipping 0.17 percent and the tech-heavy Nasdaq losing 0.35 percent.