PARIS – The specter of Europe’s debt crisis returned Thursday after a brief respite, as bank stocks fell sharply on worries about losses on government debt and a French bond auction drew lackluster demand from investors.

Financial stocks slumped as it became clear banks would have trouble raising billions in new capital in coming months. In Italy, trading in UniCredit shares was halted after they lost a quarter of their value since yesterday morning, when the bank announced it had to offer huge discounts to investors to attract new capital.

The banks need the money to cover potential losses on government debt, whose value has plummeted across most of Europe in recent months on fear of defaults. Many countries in the region have to roll over billions in debt in coming months, putting huge focus on their bond auctions.

France raised euro7.96 billion ($10.31 billion) on Thursday, at the top of its goal, in an auction where demand was solid but far less than at the last sale in December. The borrowing rate for the 10-year bonds, which made up most of the auction amount, rose to 3.29 percent from 3.18 percent last time.

The sale also included 12-year, 24-year and 30-year bonds, and analyst Louise Cooper of BGC Partners said that just the fact that France was auctioning long-term debt indicated its position was fairly solid.

“When countries start to see their funding costs shoot up, then they issue short-term debt as this tends to be cheaper,” she said. “Long-term funding is a sign of confidence in a country.”

But she added that the demand level was “a little worrying, especially as France has a lot of debt to refinance this year.”

The country is under close scrutiny since ratings agencies warned they could strip it of its top AAA grade because of the impact of the crisis and a looming recession on its public finances. A downgrade would likely push France’s borrowing costs even higher.

France’s banks are burdened with huge amounts of government bonds from weak countries like Greece, and boosting them with state money could be expensive — and possibly trigger a downgrade for France.

Formerly routine affairs, European government bond auctions have become tense ordeals during the crisis. Countries that cannot raise money at reasonable rates must be rescued with bailout packages, and investors have grown concerned in recent months that even countries in the so-called European “core” could join that ignominious club. Thus far, only the relatively small economies of Greece, Ireland and Portugal have sought bailouts.

At the very least, if countries like France are forced to pay more to borrow money, they may become unwilling — or unable — to support their smaller neighbors.

After weeks of watching the bond yields of Italy, France and Spain rise, investors got a small respite this week. Germany and Portugal both sold bonds Wednesday at lower rates than previous auctions.

But France’s auction result was not quite as good, while Hungary — a non-euro member of the EU — saw its borrowing rates jump higher in a bond sale of its own. The country’s tense financial situation has deteriorated in recent weeks, pushing it to accept negotiations for a standby loan from the International Monetary Fund.

The bad news helped weaken sentiment in European markets, pushing the euro to $1.2798, a 15-month low against the dollar.

On the secondary market, where the issued bonds are later traded openly, the yield on 10-year bonds in Italy and Spain — both considered too big to bail out — were on the rise. Italy’s rose above the psychologically sensitive level of 7 percent, which is considered unsustainable in the longer term.

European financial stocks were hit hard as the debt worries resurfaced. To protect banks against losses on government bonds, European governments are forcing them to keep more safe capital on hand. But raising that money has proved tricky for some, since investors are reluctant to buy their stock or bonds.

Italy’s largest bank, UniCredit, announced Wednesday it would offer stock at a 69 percent discount to raise cash — a disturbing sign of just how pressed banks are.

More bad news came Thursday, when the Financial Times reported that Spain’s government thinks its banks will have to raise euro50 billion more than previously thought. That news sent Spanish bank stocks tumbling and contributed to losses in other countries. France’s Societe Generale SA was down 5 percent, for example.

The continued volatility in markets is another sign that investors don’t put much stock in the “solutions” unveiled at a summit last month that committed governments to a new treaty that would give European bureaucrats substantial oversight of their budgets.

Leaders hoped to reassure markets that overspending would never again threaten state solvency, but investors have noted that it does nothing to solve the immediate crisis — the heart of which is rising bond yields — and is unlikely to ever be enacted as strongly as it was conceived anyway.

Instead, they want the European Central Bank step in more forcefully to drive down borrowing costs by buying bonds in the open market, a practice it engages in only modestly right now. Analysts argue that would give governments time to enact longer-term solutions, like restoring credibility in their spending habits and allowing them to invest in growth. For now, governments can only slash spending to woo markets, but that also cripples already anemic growth and threatens to usher in a new recession.

Despite these challenges, French Prime Minister Francois Fillon promised on Thursday that France would invest in growth, by reducing the taxes companies pay on salaries, in the hopes of driving down the unemployment rate, which stands at 9.7 percent ahead of presidential elections this spring.

Fillon said France would cut debt with a new sales tax and by taxing financial transactions.

The latter is controversial since many have argued it will only work if applied across the European Union or even the world. Britain and the U.S. — both of which are major centers of finance — have strongly resisted it.

Fillon vowed France would push ahead.

“It’s normal that all sectors participate in a collective effort, including the financial sector,” he said.

WASHINGTON – The Justice Department announced Thursday that it will allow the creation of the world’s largest stock exchange operator after the German conglomerate that wants to buy the New York Stock Exchange sells its stake in a third, smaller American stock exchange operator.

Justice Department lawyers filed papers in U.S. District Court in Washington that would allow the merger of NYSE Euronext and Deutsche Boerse AG after the German company orders one of its subsidiaries to sell its 31.5 percent stake in Direct Edge Holdings LLC, which is the United States’ fourth largest stock exchange operator. In addition to the sale of Direct Edge, the proposed settlement between Justice and the two companies prohibits them from participating in the business or running of Direct Edge.

The German company, which operates the Frankfurt stock exchange, offered to buy NYSE Euronext for $10 billion in February. The transaction would create the world’s largest exchange operator. NYSE Euronext owns exchanges in Paris, Lisbon, Brussels and Amsterdam, in addition to New York.

“Without the divestiture and other restrictions obtained by the Justice Department, a combined NYSE and Deutsche Borse entity could influence the actions of Direct Edge, and thereby lessen the zeal of an aggressive and innovative exchange competitor,” said Sharis A. Pozen, acting assistant attorney general in charge of the Justice Department’s Antitrust Division. “The remedy ensures that participants in the markets for U.S. equities exchange products and services will continue to receive the full benefits of robust competition in the form of competitive prices and increased innovation.”

Under the terms of the settlement, Deutsche Borse’s subsidiary, ISE, will divest itself of its interest in Direct Edge within two years.

The Deutsche Boerse-NYSE Eurostar merger would not only control important stock markets on both sides of the Atlantic, but also have a potentially dominant position in the trading of derivatives. Derivatives are complex financial products that allow investors to bet on movements in areas such as interest rates, stock indexes or commodity prices.

The combination of the two exchanges has been harshly criticized by competitors like the London Stock Exchange and U.S.-based Nasdaq.

LONDON (Reuters) – Stock markets and the euro fell on Wednesday, worried by record high borrowing costs for Italy and the Federal Reserve's decision to do nothing new to prop up growth despite warning Europe's debt crisis could hurt the U.S. economy.

The euro broke 11-month lows versus the dollar below $1.30 after Rome's auction of five-year debt, with foreign exchange markets still speculating that more rating downgrades were in prospect for euro zone governments.

"Uncertainties on the future of the debt crisis remain high and the market seems to be mainly driven by flight-to-quality this morning," said Annalisa Piazza, market economist at Newedge Strategy.

Italy paid a euro era record 6.47 percent on its new five-year bonds, compared with the previous record of 6.3 percent set in November.

Financial markets have been sliding since the start of the week as investors came to the conclusion that measures agreed at last week's EU leaders summit did not go far enough to resolve the two-year-old debt crisis.

Germany also sold debt, raising 4.2 billion euros at an auction of two-year bonds at average yields of 0.29 percent, compared with 0.39 percent at the last such auction. The German sale drew bids worth 1.4 times the amount on offer, up from 1.1 times at the last auction and the low yields illustrated how desperate investors are to find a safe haven for their money.

European shares slipped on concerns over the lack of Fed policy action with the FTSEurofirst 300 (.FTEU3) index down about 0.65 percent. The heavyweight banking sector, strongly exposed to the euro zone crisis, lagged. The STOXX Europe 600 Banking Index (.SX7P) fell 0.7 percent.

U.S. stock index futures pointed to a higher open on Wall Street on Wednesday after markets there fell sharply following the Fed's decision to leave monetary policy unchanged.

The dollar index (.DXY), which tracks the dollar's value against a basket of currencies, was off highs but still up around 0.7 percent at 80.30.

Oil and industrial commodity prices were mostly softer, with Copper falling to a two-week low, and Brent crude dipping 0.75 per cent to around $108.66 a barrel.

EURO FEARS

Economic data on euro zone industrial production in October reinforced the view that the region's economy is headed towards a contraction in the fourth quarter and beyond that into a new recession.

Output slipped 0.1 percent in October after plunging 2.0 percent month-on-month in September.

"Manufacturers are now very much on the back foot and finding life extremely challenging as domestic demand is hit by tighter fiscal policy, squeezed consumer purchasing power, and heightened euro zone sovereign debt tensions," said Howard Archer of IHS Global Insight.

The influential Munich-based Ifo Institute said Germany's economy could lose momentum over the winter and would grow just 0.4 percent next year, as uncertainty over the euro zone crisis and a global economic slowdown prompts firms to invest less and weighs on exports.

The latest Ifo forecast was just half the previous estimate for 2012 growth of 0.8 percent, and reflects a sharp deterioration in the outlook even for Europe's biggest and most successful economy over the past few months.

Rising prices, muted wage growth and public sector cuts have squeezed disposable incomes across Europe. Spain's Inditex SA (ITX.MC), the world's largest clothing retailer and owner of the popular Zara label, said sales growth eased in the third quarter.

The number of Britons out of work also rose to its highest level in more than 17 years in the three months to October, official data showed.

Meanwhile the region's banks tripled their demand for European Central Bank-offered dollars at the central bank's second weekly offering since slashing the cost of borrowing dollars, making the facility much more attractive to banks and easing funding woes.

(Additional reporting by Sarah Morris and Silvia Antonioli; editing by Patrick Graham)

SINGAPORE (Reuters) – Japanese stocks hit a two-and-a-half-year low and the euro struggled on Thursday after a disappointing German bond sale raised alarm that Europe's ever-worsening sovereign debt crisis is starting to affect even the continent's economic powerhouse.

Stocks elsewhere in Asia failed to sustain a rebound from sharp falls in the previous session, but European shares were expected to eke out small gains.

Financial bookmakers predicted Europe's major indexes in London, Frankfurt, and Paris would open 0.3-0.5 percent higher.

Oil and copper made modest rebounds from a sell-off on Wednesday, when weak data from Europe, the United States and China stoked fears the global economy may be heading for a recession that would dull demand for industrial commodities.

Germany's bond sale on Wednesday had one of the worst results since the launch of the euro, raising concern about the price Berlin may pay for its role as paymaster to a region racked by a crisis that has toppled governments in Greece and Italy.

"If Germany has to pay higher costs for its borrowing, it's obvious it cannot help the entire euro zone," said Makoto Noji, senior strategist at SMBC Nikko Securities in Tokyo.

"If German bond yields keep rising, that could even be a trigger for break-up of the euro."

Tokyo's Nikkei share average fell 1.8 percent to their lowest close since March 2009. Japanese markets were closed for a holiday on Wednesday, when other Asian markets had tumbled.

MSCI's broadest index of Asia Pacific shares outside Japan spent much of the trading day in positive territory before running out of steam.

The earlier gains had been partly driven by expectations that a slowdown in China will prompt Beijing to take monetary policy easing steps such as cutting banks' reserve requirement ratios, allowing them to lend more of their deposits.

"Anticipation of policy loosening in China after the bad flash PMI yesterday is spurring some short-covering," said Linus Yip, strategist with First Shanghai Securities in Hong Kong.

Wall Street shares fell more than 2 percent on Wednesday, and world stocks fell to a six-week low, on data showing slowing factory output in manufacturing titans China and Germany and weak consumer spending in top consumer the United States.

U.S. markets will be closed on Thursday for the Thanksgiving holiday.

GERMAN GLOOM

Germany's bond sale added to the gloom, knocking the euro down 1 percent. Depressed yields in Europe's last safe haven played a part, but analysts warned it also signaled a broader shunning of the region's financial system.

"The other part is that market makers don't want to have a position because of the very distressed nature of financial markets as a whole," said Marc Ostwald, strategist at Monument Securities. "There's certainly a partial element of 'they would rather not have euros' in there."

The single currency tottered to around $1.3360, up a bit less than 0.2 percent on Thursday, having fallen as low as $1.3318 in the previous session.

Against the yen it fell around 0.2 percent to a six-week low just below 103.0.

The inexorably widening euro zone crisis — which has pushed up risk premiums for Spanish, French, Italian and Belgian government bonds — is making it increasingly hard for European banks to access dollar funding in the money markets.

The stresses pushed dollar LIBOR rates, the benchmark for banks lending to each other, up for the 103rd straight session on Wednesday and has driven the cost of swapping euros into dollars to the most expensive levels since the global financial crisis in 2008.

In Asian credit markets, the Asia ex-Japan iTraxx investment grade index saw spreads widen around 10 basis points, reflecting heightened risk aversion.

U.S. crude oil rose 0.3 percent to around $96.60 a barrel, following on from a 2 percent slide on Wednesday, and Brent crude rose 0.6 percent to around $107.60.

London Metal Exchange copper rose 0.2 percent to around $7,250 a tonne, rebounding from a drop of more than 1 percent earlier in the session that had seen it fall to a one-month low around $7,100.

"The demand outlook is deteriorating," said David Thurtell, director of commodity research at Citigroup in Singapore.

"With so much sovereign debt uncertainty and with Western European austerity measures kicking in, copper is likely to trade in the $6,500 to $9,500 range over the period to end-2012."

(Additional reporting by Hideyuki Sano in Tokyo, Ian Chua in Sydney, Manolo Serapio Jr in Singapore and Umesh Desai of IFR in Hong Kong; Editing by Kim Coghill)

NEW YORK – The stock market fell Monday after a jump in Italy’s borrowing costs reminded investors of how much work remains to be done to contain Europe’s debt problems.

The Dow Jones industrial average lost nearly 75 points. Bank stocks fell the most. European markets also fell and the euro weakened against the dollar.

Major indexes closed higher last week as Greece and Italy moved to form new governments and took other decisive steps to get their debt troubles under control. However worrisome signs re-emerged Monday.

The Italian government had to pay 6.29 percent at an auction of five-year bonds, the highest rate since since 1997. Italy paid a much lower rate of 5.32 percent at a similar auction last month. That’s a sign investors are still concerned about Italy’s ability to repay its debts. Stocks tanked last Wednesday after key Italian borrowing rates jumped above 7 percent, a level widely seen as unsustainable.

Also Italy’s biggest bank, Unicredit, reported a $14.4 billion loss.

“The problems these countries are dealing with go well beyond their prime ministers,” said Dan Greenhaus, chief global strategist at the brokerage BTIG. “Italy didn’t get where it is in five minutes. And it’s not going to get out of where it is in five minutes. This is going to take months.”

The Dow fell 74.70 points, or 0.6 percent, to close at 12,078.98. Bank of America Corp. fell 2.6 percent and JPMorgan Chase & Co. fell 2.2 percent, the largest drops among the 30 large companies in the Dow.

The Standard & Poor’s 500 index fell 12.06 points, or 1 percent, to 1,251.79. The Nasdaq composite index fell 21.53, or 0.8 percent, to 2,657.22.

Three stocks fell for every one that rose on the New York Stock Exchange. Volume was very light at 3 billion shares.

Stocks have risen since early October on encouraging signs of progress in containing Europe’s debt crisis, stronger U.S. corporate earnings and better news on the U.S. economy. The S&P 500 has soared 13.7 percent since hitting its low for the year on Oct. 3.

That surge has drawn big investors back into the stock market and opened the door to a long line of companies waiting to go public. The flow of money from institutions into U.S. stock funds hit $7.3 billion last week, the third largest tally this year, according to fund tracker EPFR Global.

Angie’s List, a customer review website, Delphi Automotive and seven other companies are scheduled to go public this week. If they all wind up going through, it would be the biggest week for IPOs in four years, according to Renaissance Capital, an IPO advisory firm.

In corporate news, the airline Emirates placed an order for 50 Boeing 777s, one of the largest orders ever placed with the aircraft maker. Boeing Co. also picked up a new customer, Oman Air, which ordered six 787s. Boeing rose 1.5 percent.

J.C. Penney Co. fell 2.8 percent after reporting a quarterly loss. The department store operator said its results were weighed down by restructuring costs. The company also lowered its earnings outlook for the rest of the year.

Lowe’s Cos. rose 1.7 percent after the country’s second-largest home-improvement retailer reported revenue and earnings that beat analysts’ expectations.

The Dow has made gains in six of the past seven weeks, and is still up 1 percent for the month. The S&P 500 and the Nasdaq are slightly lower.

NEW YORK/SAN FRANCISCO (Reuters) – Groupon Inc faces its toughest sales pitch next week when the daily deals website launches a roadshow to persuade investors to buy shares in its initial public offering.

Even after scaling back the issue and cutting the company's valuation in half, the IPO may struggle. Aside from recent regulatory and operational bumps, investors and analysts are troubled by Groupon's business model.

The concept is simple and potentially lucrative: sell a coupon for a local business and take a cut of the proceeds for facilitating the deal. But the market has attracted hundreds of rivals, including well-funded giants such as Google Inc (GOOG.O) and Amazon.com Inc (AMZN.O). Even Facebook was a Groupon rival for a short while before it shut down its effort.

"My views have not changed, despite the reduced valuation. We still have significant long-term questions about their business model," said Michael Cuggino, who helps manage about $15 billion at Permanent Portfolio Funds in San Francisco.

"They will get a lot of very hard questions from investors focused on their business outlook and profit expectations," Cuggino said, adding he would not be attending the road show and is "nowhere near" investing in Groupon.

Other investors said they were intrigued enough to attend the roadshow, but saw the IPO price as still on the high side.

Groupon plans to sell 30 million shares, or less than a 5 percent stake, at between $16 and $18 each, raising up to $540 million, according to a regulatory filing on Friday.

The midpoint would value Groupon at $10.8 billion, far less than the $20 billion initially expected but still above the $6 billion that Google offered to pay for the company last year.

"Groupon is an impressive business, but it's coming with a pretty rich price tag," said Ryan Jacob, manager of the Jacob Internet Fund, who watched Groupon's roadshow presentation online this morning.

"They're still young enough that the price seems too high to us — even at the reduced level," Jacob added. "There's impressive growth potential but a lot of risks."

David Berman, a technology and retail specialist at hedge fund firm Durban Capital, said he would attend the roadshow but has reservations about the IPO.

"It's a big part of the puzzle in terms of the future of retail. Whether it's a good model and priced right is another matter," he told Reuters.

"The big issue for me is competition. Are there barriers to entry?" Berman added. "The other question is repeat business. It's one thing to buy a Groupon once and visit the merchant, but are customers coming back again and again?"

NEW BUSINESSES

Rather than address the question of when it might start turning a profit — a key issue for investors — Groupon executives in the online version of its roadshow described how they are trying out new businesses, such as travel deals and selling discounted products online.

"We've just started doing these things in the last few months," said Chief Executive Andrew Mason. "We're finding our customers are buying at the same kinds of conversion rates as they do with local. We've been able to translate this audience because we have this trusted brand."

The company launched Groupon Live, a partnership with Live Nation (LYV.N) to offer discounted concert tickets; Groupon Getaways, its travel business; and Groupon Goods, the discounted product market, in the third quarter.

"These are expected to grow and become a larger part of Groupon's overall business," Chief Financial Officer and former Amazon executive Jason Child said. "The success of these new categories greatly increases our market opportunity."

While the Chicago-based company's revenue and sales staff have grown dramatically since its founding in October 2008, it has never been profitable on a net basis. It made a narrower operating loss in the third quarter, after excluding stock-based compensation.

"There are a lot of beat up Internet stocks that are profitable. This one isn't," said a manager of a Bay Area tech-focused investment firm.

He said he would look at Groupon but didn't feel like he had to own it: "A $20 billion valuation is completely ludicrous. Ten billion is still too much."

The investor didn't want to be identified because he planned to meet with Groupon.

(Reporting by Alistair Barr in San Francisco and Clare Baldwin in New York; editing by Carol Bishopric)