Spain and Italy have rejected the need for a bailout after markets fall sharply on disappointment that the European Central Bank did not announce new immediate steps to tame the eurozone debt crisis.
ECB head Mario Draghi insisted last night the embattled single currency was "irreversible", damning speculative financial market bets against the euro for pushing up government borrowing costs to unsustainable levels.
But in the absence of concrete measures, the markets returned to the attack, with Spanish borrowing costs spiking back to danger levels above seven per cent and Madrid stocks slumping more than five per cent as Italy was also hit badly.
United in adversity, Spanish Prime Minister Mariano Rajoy told a joint news conference in Madrid with his Italian counterpart Mario Monti that their "two countries want to work together" to get through the debilitating crisis.
"We are conscious that we are demanding great efforts from our citizens but we know that is the only way out," Mr Rajoy said while Mr Monti added: "The solution can only be found if we all do our homework."
Both rejected outright any idea that they would need an international bailout, pointing instead to Mr Draghi's announcement in Frankfurt that the ECB might intervene on the government bond markets to drive down borrowing costs.
"A bailout, no. But actions to prevent that a country's borrowing costs become too expensive, these types of aids we should study," Mr Monti said.
Last week, Mr Draghi had promised he would do everything to save the euro, raising hopes the ECB would intervene directly on government bond markets to force down borrowing costs for the likes of struggling Spain and Italy.
He reiterated on Thursday the ECB was ready to do this - but not just yet, while the bank kept its benchmark interest rate unchanged.
In the face of growing pressures, the ECB "may undertake outright open market operations of a size adequate to reach its objective", he said, but added the details would be worked out "in the coming weeks".
Whatever the circumstances, Mr Draghi said it was "pointless" to bet against the euro. "It stays. It stays. It stays," he insisted.
Analysts said markets felt let down after Mr Draghi last week had promised that the ECB would do all in its power to safeguard the euro.
Most had taken his comments then to mean the ECB would step into the bond markets, effectively acting as a backstop to prevent eurozone borrowing costs crippling governments desperately trying to balance the public finances.
The euro briefly topped $US1.24 after Mr Draghi spoke but then plunged when there were no follow-through measures, hitting $US1.2160 in late trade.
"As markets digest the fact the ECB has done nothing concrete to sort out Spain's problems, $US1.20 comes back into view," said research director Kathleen Brooks at trading site Forex.com.
The International Monetary Fund meanwhile called for more action in Europe as the crisis undercuts global growth prospects.