Europe's leaders have vowed to mobilize all possible means to counter the region's escalating crisis after Spain's borrowing costs threatened to spiral out of control. Yields on 10-year Spanish bonds surged to a record high of almost 7.3 percent as investors ignored the victory of pro-bailout parties in Greece's elections.

The closely-watched two-year yield rocketed by 65 basis points in a matter of hours, signaling a near-total collapse of confidence in Spain's €100 billion rescue from the EU last week to shore up its banking system.

Cristobal Montoro, the economy minister, warned that Spain is now in a "critical" condition and pleaded with the European Central Bank to act with "full force" to defeat markets hostile to the euro project.

Bank of America said Spain may need a second rescue to tide it through the next three years, pushing the total loan package towards €450 billion -- a sum that would test the EU bail-out machinery and cause serious knock-on effects for Italy. A draft communique from the summit of G20 leaders in Mexico said Europe will take "all necessary measures" to hold the eurozone together and break the "feedback loop" between sovereign states and banks.

A separate text for next week's EU summit vowed to "mobilize all levers and instruments", though details were thin. Italy said it would push for a "semi-automatic mechanism" -- probably involving the ECB -- to cap the bond yields of states in trouble.

Bill Gross, head of the world's biggest bond fund Pimco, told Bloomberg TV that Spanish bonds were no longer a "safe environment" and warned that Germany itself had become a "credit risk" as the crisis metastasizes. Spain's economy is twice the size of Greece, Portugal, and Ireland combined.

Spain's financial daily Cinco Dias said the bond rout had been a "massacre". The IBEX share index in Madrid fell 3pc and Italy's MIB dropped 2.8 percent.

Angel Gurria, the head of the OECD club of rich states, predicted action from the ECB within a week, saying it was "high time" for leadership from Frankfurt. "We have run out of options. The Europeans have to display their awesome firepower," he said.

Mr Gurria urged the ECB to force down yields on Spanish and Italian bonds and deploy "every instrument, tool, and asset" in its arsenal, saying it would longer be enough to cut interests rates.

He warned that the crisis had been allowed to fester for so long that Spain and Italy may need soft debt-restructuring -- perhaps by extending debt maturities -- since public opinion in these nations will no longer tolerate ruinous debt service costs.

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