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Spain and Italy reinstated a short-sale ban on stocks as bank shares plunged to record lows, bond yields rose and the euro traded below its lifetime average against the dollar on concern the debt crisis is growing.

Spain’s CNMV market regulator banned the creation of negative bets on equities through shares, derivatives and over-the-counter instruments for three months. Italy’s Consob prohibited the practice on 29 banking and insurance stocks for one week, citing “grave tensions” in financial markets.

Today’s move echoes decisions in August last year by the two nations plus France and Belgium after European banks hit their lowest levels since the credit crisis of 2008 and 2009. Most bank stocks extended their decline once the bans were lifted.

“I don’t think it is particularly smart but it is to be expected,” said Owen Callan, senior dealer at Danske Bank A/S in Dublin, in a phone interview. “Last time around it didn’t really have any lasting impact. This is trying to avert hedge-fund speculation, but the selloff is not about speculation. This is not hedge funds trying to bring down the market.”

Short-sellers sell borrowed shares with plans to buy them back later at a lower price, a practice some politicians and investors blame for roiling markets.

Regional Aid

Government bond yields in the U.S., U.K. and Germany fell to records, while Spain’s IBEX 35 Index had its worst two-session intraday decline since 2008 as concern grew countries in Europe may need further assistance to cope with their debt levels. The prospect of more Spanish regional governments following Valencia last week in asking for aid sent the cost of insuring the nation’s debt to a record.

Both countries’ prohibitions exclude market-making activities.

The European Securities and Markets Authority “is aware” of the bans, David Cliffe, an ESMA spokesman, said in a telephone interview today. ESMA was set up last year to harmonize the implementation of market rules across the European Union.

France’s markets regulator, the AMF, said in an e-mail today it has no plans at this stage to introduce a ban because the current market situation “does not seem to justify such a decision.” Veerle De Schryver, a spokeswoman at Belgium’s markets regulator in Brussels, also said the agency has no plans to introduce new limitations on short-selling.

Spanish Sales

The IBEX 35 Index dropped 1.1 percent to 6,177.40 at the 5:30 p.m. close in Madrid, after earlier falling as much as 5.5 percent. Italy’s FTSE MIB lost 2.8 percent to 12,706.36, paring an earlier decline of 5.2 percent. The Euro Stoxx Banks Index declined as much as 6.4 percent to a record low today, before rebounding in afternoon trading.

Last year’s ban in Spain, put in place on Aug. 11, coincided with a 10 percent gain for the financial stocks it covered. The IBEX rose 6 percent in the period. The stocks have fallen 40 percent since the ban was lifted on Feb. 15 this year, according to a basket compiled by Bloomberg.

Germany’s DAX Index extended declines today after the bans were announced, as investors sold European indexes outside of Spain and Italy as a hedge against losses in the region. September futures on the gauge lost 3.1 percent to 6,428 at 6:50 p.m. in Frankfurt, after falling about 2 percent before the bans.

The country still has a ban on naked short selling of stocks and sovereign debt adopted in May 2010. Naked short selling occurs when traders sell securities without owning them in the first place.

“The unintended consequence is that people trying to hedge risk will probably try to short other markets,” said Danske Bank’s Callan. “The short risk is misallocated into other markets, so it can drag even the good markets down. You go to things like the DAX, which is liquid and is unlikely to have any short sale bans put in.”

(Adds French regulator’s stance in ninth paragraph.)