The markets were initially unsettled by news that the French president had threatened to pull France out of the eurozone

Share prices have dropped across Europe and the euro has slid to an 18-month low against the dollar on fears that the eurozone bailout of Greece will fail and reports that French president Nicolas Sarkozy threatened to pull his country out of the single currency altogether to force Germany to agree to the rescue plan.

The panic selling has been stoked by news that Spain's underlying inflation rate turned negative in April for the first time on record, adding to fears that the country is facing a cash crunch.

By lunchtime the FTSE 100 index was down almost 100 points with indices across Europe in negative territory. Frankfurt's DAX index was down more than 1%, Paris's CAC-40 index down 2.6% and the IBEX 35 in Madrid down 4%. The ASE in Athens was down more than 3.0%. The euro, meanwhile, dropped down to $1.2432, having been trading early in the day 0.3% higher against the US currency.

Earlier in the day, the National Statistics Institute in Madrid said core consumer prices, which exclude energy and fresh food, fell 0.1% from a year earlier, after rising 0.2% in March. Spain is in danger of missing the government's target of a 1.8% increase in GDP in 2011 which would have a knock-on effect on its plans to reduce its deficit, which stood at 11.2% of GDP last year.

The markets were initially unsettled by news that the French president had threatened to pull France out of the eurozone. The startling threat was made at a Brussels summit of EU leaders last Friday, at which the deal to bail out Greece was agreed, according to a report in El País newspaper quoting Spanish Prime Minister José Luis Rodríguez Zapatero.

Zapatero revealed details of the French threat at a closed-doors meeting of leaders from his Spanish Socialist Party on Wednesday.

Sarkozy demanded "a compromise from everyone to support Greece ... or France would reconsider its position in the euro," according to one source cited by El País.

"Sarkozy went as far as banging his fist on the table and threatening to leave the euro," said one unnamed Socialist leader who was at the meeting with Zapatero. "That obliged Angela Merkel to bend and reach an agreement."

A different source who was at the meeting with Zapatero told El País that "France, Italy and Spain formed a common front against Germany, and Sarkozy threatened Merkel with a break in the traditional Franco-German axis."

El País also quotes Sarkozy as having said, according to another of those who met Zapatero, that "if at time like this, with all that is happening, Europe is not capable of a united response, then the euro makes no sense".

Germany has been reluctant to act throughout the Greece crisis. But the meeting in Brussels finally put together a €110bn (£94bn) rescue package.

The German government's deputy spokeswoman, however, was quoted by Reuters as saying that the speculation that Sarkozy threatened to leave the euro is "without any basis".