Global markets were muted on Tuesday after a rating agency warned it could downgrade the debt of most eurozone countries, raising pressure on European leaders to find a lasting solution to their crisis this week.
The Standard & Poor's rating agency threatened late Monday to downgrade 15 countries that use the euro, including Germany and France, whose debt ratings are considered the linchpins of the European bailout system.
The announcement stopped a several-day rally in its tracks, just hours after the German and French leaders unveiled a series of proposals, including punishing governments for overspending, that they hope will persuade the European Central Bank or the International Monetary Fund to lend the eurozone more support.
Concerns that several European countries could have trouble paying down their debt is nothing new, of course: It lies at the heart of the crisis strangling Europe. But an S&P downgrade could make matters worse.
Worries about high debt loads, especially in Italy, have in recent weeks sent bond yields _ the rate countries would pay when borrowing on markets _ skyrocketing. That makes it harder for those countries to pay back their loans since the amount of interest they have to pay goes up.
Italy and Spain's yields have fallen back down in recent days on hopes of a grand European plan against the crisis. The yields remained near monthly lows on Tuesday, but disappointment with the summit's results this week or an S&P downgrade could push them back up.
Stock markets and the euro quickly recovered losses they initially suffered after the S&P ratings warning.
"The positive mood created by comments over the weekend and yesterday has been replaced by renewed gloom," said Sebastian Galy, an analyst with Societe General, but he added: "If the market is capable of concluding that this is just a case of a backward-looking rating agency seeing what we already knew, a 'blip' will be all that is felt."
Italy's 10-year bond yield edged down 0.05 of a percentage point to 5.79 percent, but France's increased 0.11 percentage point to 3.27. Germany, which has been largely insulated from the crisis, saw its yield edge up 0.03 percentage point to 2.23 percent.
In Germany, the DAX stock index dropped 0.4 point to 6,085, while France's CAC-40 recouped earlier losses to move up 0.1 percent to 3,205. The FTSE index of leading British shares rose 0.2 percent to 5,5580.85.
The euro was also climbing again after a plunge, trading up 0.1 percent at $1.3412.
The mixed sentiment came a day after a big rally, fed by President Nicolas Sarkozy and German Chancellor Angela Merkel's proposals meant to ensure Europe never again finds itself in a crisis like the current one. But analysts said Tuesday that investors might grow increasingly skeptical of their plan, which lacked detail and mostly rehashed ideas that had already been floated.
"The German and French proposals to tighten fiscal policy create a 'straitjacket,' which makes it difficult for the peripheral economies and some of the core economies like Italy to improve debt sustainability," said Neil MacKinnon, an analyst with VTB Capital. "Without durable economic growth, Italy is to find it difficult to generate the tax revenues required to reduce their debt/GDP ratio."
Earlier, Asian markets fell in the wake of the S&P announcement.
Japan's Nikkei 225 dropped 1.4 percent to close at 8,575.16. South Korea's Kospi fell 1 percent to 1,902.82 and Hong Kong's Hang Seng lost 1.2 percent to 18,942.23. Australia's S&P/ASX 200 shed 1.4 percent to 4,262.
In mainland China, the Shanghai Composite Index edged down 0.3 percent to 2,325.91.
Benchmark crude for January delivery rose 18 cents to $101.17 a barrel in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.