Spain's struggle to drum up demand for new bonds raised not only the nation's borrowing costs but also the spectre that the euro zone's sovereign debt crisis is far from over. Equities on both sides of the Atlantic fell as a result.

Spain sold a total of 2.59 billion euros of bonds, compared with a maximum target of 3.5 billion euros, according to Bloomberg News. Yields on the five-year notes it sold rose to an average 4.32 per cent from 3.38 per cent in a sale on March 1. Investors bid for 2.46 times the amount of debt allotted, compared with a bid-to-cover ratio of 2.59 at the previous auction.

That boosted the yield on Spanish 10-year bonds as much as 26 basis points to 5.71 per cent. Italian bond yields soared too.

Meanwhile, the European Central Bank decided to keep interest rates at a record low of 1.0 per cent, while the bank's president Mario Draghi warned that "downside risks to the economic outlook prevail".

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"Given the present conditions of output and unemployment, which is at historical high, any exit strategy talking for the time being is premature," he said.

Euro-area services and manufacturing output contracted for a second month in March. A composite index based on a survey of purchasing managers in both industries dropped to 49.1 from 49.3 in February, London-based Markit Economics said today. That's above an initial estimate of 48.7 on March 22. A reading below 50 indicates contraction.

In Europe, the Stoxx 600 Index lost 2.2 per cent on the day.

In early afternoon trading in New York, the Dow Jones Industrial Average fell 0.91 per cent, the Standard & Poor's 500 Index dropped 0.98 per cent and the Nasdaq Composite Index shed 1.66 per cent.

The Spanish auction "serves as a reminder to the market that Europe is still with us," Mark Freeman, chief investment officer at Westwood Holdings Group in Dallas, told Bloomberg. "We still have a long way to go before things get worked out."

ADP's private-sector jobs data showed US employers added 209,000 jobs in March, continuing the recent trend of a pickup in the labour market.

Separately, the Institute for Supply Management's services-sector index for March fell to 56.0 per cent from 57.3 per cent in February, the private group reported.

It adds to the case that the world's largest economy continues to show signs of a sustained recovery. While that is good news, it also underpins the case that the US Federal Reserve won't need to add more stimulus measures to their promise of keeping interest rates at current lows until late 2014.

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Federal Reserve Bank of Richmond President Jeffrey Lacker told Bloomberg that financial markets had assigned too high a probability that the Fed would begin a new round of asset purchases to reduce borrowing costs and spur economic growth.