With the political situation in Spain so precarious, investors in sovereign debt are wary of the government's promises to cut about 27 billion euros from its budget.

This caused Spanish bond yeilds to soar and raised fresh concerns about a possible huge bailout.

Reuters:

Concerns Spain will struggle to meet tough deficit targets and treat its ailing banks as the economy slows have hampered its debt issuance plans and fuelled concern it might be forced to follow Greece, Ireland and Portugal in seeking a bailout.

"Spain has become the focal point for investor anxiety about the euro zone. This is a bout of investor nervousness, the severity of which is difficult to ascertain at this point," said Nicholas Spiro at Spiro Sovereign Strategy.

European shares extended their losses after the auction and the cost of insuring Spanish and Italian debt against default rose. Spanish yields rose on the secondary market, where the key 10-year bond was up around 25 basis points close to 5.7 percent.

Yields on 10-year debt had fallen as low as 4.6 percent in late January as cheap European Central Bank cash aided a rally in weaker periphery state debt.

Concern over the Spanish auction also helped drive the euro to a three-week low versus the dollar.

A yeild of 6% or above is considered danger territory where the government would be unable to make good on its debts. And any bailout of the Spanish economy would necessarily mean hundreds of billions of euros - some believe close to a trillion - that would be needed to save Europe's 5th largest economy from default.

The EU has successfully kicked the can down the road and pushed the crisis back a few months or a year. But eventually, the problems will re-emerge and given Spain's political unrest over the austerity budget being proposed, there is no guarantee that the crisis won't emerge sooner rather than later.