World markets tumbled on Wednesday amid acute fears that Greece’s debt crisis would spread like wildfire through Europe after a leading credit ratings agency downgraded the country’s debt to junk status and cut Portugal’s rating as well.

The downgrades by Standard & Poor’s reinforced investor fears that Europe leaders were failing to get a handle on the government debt crisis afflicting Greece and that there is now a big chance of contagion with higher borrowing costs hitting other euro-using countries with weak finances.

“Contagion is the ‘buzz’ word and investors alike seem to be using it as a reason to take cash off the table,” said Andrew Sykes, a trader at Spreadex.

In Europe, the FTSE 100 index of leading British shares was down 52.98 points, or 1 percent, at 5,550.54 while Germany’s DAX fell 107.20 points, or 1.7 percent, to 6,052.31. The CAC—40 in France was 81.11 points, or 2.1 percent, to 3,763.49. These falls come on top of Tuesday’s biggest declines in months following S&P’s downgrades.

Earlier, Asian stocks tanked, with Japan’s Nikkei 225 stock average leading the region-wide retreat with a 2.6 per cent fall to 10,924.79. Wall Street was poised for further declines following Tuesday’s hammering _ Dow futures were down 27 points, or 0.3 per cent, at 10,928 while the Standard & Poor’s 500 futures fell 2 points, or 0.2 percent, at 1,179.

The most dramatic decline Wednesday was registered in Portugal, where the main PSI 20 index in Lisbon slid 5.8 percent to 6,736.26.

Athens’ composite ASE index fared modestly better after the regulator banned short-selling of banking stocks for two months _ following five days of dramatic declines, the index was down only 0.9 per cent at 1,682.24.

For many in the markets, the euro area is now facing a real existential threat because the rules set up to support the euro have not prevented governments from spending their way into a crisis.

“The message is clear that the euro only works if all countries give up financial sovereignty and pool resources for common taxes, budgets and social security,” said David Buik, markets analyst at BGC Partners.

“If these boxes are not all ticked the whole philosophy and ethos of a united Europe crumbles in to dust,” he said.

Investors will be keeping a close watch on Berlin, where both Dominique Strauss-Kahn, the managing director of the International Monetary Fund, and Jean-Claude Trichet, the president of the European Central Bank, are expected to press German Chancellor Angela Merkel that the eurozone’s largest country has to release its share of the euro45 billion bailout fund for Greece swiftly if this crisis is not going to lead to wide-scale government defaults, another banking crisis and a swift return to recession across the whole single currency bloc.

Germany, where the bailout is unpopular with voters, has been slow in authorizing the release of the funds _ its failure to do so stoked the panic in the markets, which has seen market rates on Greece’s two-year bonds skyrocket to 21 per cent.

“Jittery investors are concerned that the instability in the markets could snowball into something much bigger, and are hoping that real progress today may help to melt the ice,” said Anthony Grech, market strategist at IG Index.

There’s even talk now in the markets that the European Central Bank may have to play a more active role in resolving this crisis, especially as the policymakers in the European Union and the institutions have failed to provide a lead.

Many analysts are now postulating the idea that the European Central Bank may invoke emergency powers to buy Greek bonds, using the argument that the turmoil in Greece was threatening the stability of the euro area.

Even then, the consensus in the markets is that Greece will have to restructure its debts, by either cutting the amount it pays debt-holders _ Standard & Poor’s warned on Tuesday they might get only 30-50 per cent of their principal investment back _ or by extending the terms of repayment.

The euro managed to find some respite after slumping to a one-year low of $1.3146 in the wake of the S&P downgrades _ by late morning London time, the euro was up 0.1 per cent at $1.3172.

Some distraction will likely emerge later when the U.S. Federal Reserve unveils its latest policy statement following the conclusion of its interest rate meeting.

Though no change in the Fed funds rate is expected from the current 0-0.25 percent, investors will be focusing in on the minutiae of the accompanying statement, particularly on whether there is an ongoing commitment to keep borrowing costs low for “an extended period.”

“Wider contagion and the negative impact on global equity markets, if maintained, might stay the Fed’s hand,” said Neil Mackinnon, global macro strategist at VTB Capital. “International market developments will not be ignored.”

Elsewhere in Asia, Hong Kong’s Hang Seng dropped 1.5 per cent to 20,949.40 and South Korea’s Kospi was off 0.9 percent to 1,733.91. Markets in Australia and India retreated between 1 per cent and 2 per cent. Shanghai closed down 0.3 percent.

The euro stabilized after a steep drop the day before to a near 1-year low before slipping again, trading down at $1.3153 from $1.3155. The dollar rose to 93.42 yen from 93.07 yen.

Oil prices dropped for a second straight day, with benchmark crude for May delivery down 96 cents at $81.46 a barrel.

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