Image caption Planned austerity measures have proved unpopular with the Irish people

Shares and the euro have fallen sharply on fears that the Irish Republic's debt crisis could spread to other European countries with high budget deficits.

Meanwhile, Dublin will publish a four-year austerity plan on Wednesday amid fears the government could fall.

European markets fell steadily all day, with the FTSE 100 ending 1.75% lower. In New York, the Dow Jones ended the day down 1.3%.

And the euro has fallen 1.9% against the dollar to less than $1.34.

Meanwhile German Chancellor Angela Merkel said that Europe is "facing an exceptionally serious situation as far as the euro's situation is concerned".

"I don't want to paint a dramatic picture, but I just want to say that a year ago we couldn't imagine the debate we had in the spring and the measures we had to take" over Greece, Ms Merkel said.

Banks hurt

Other factors also weighed on market sentiment, including renewed hostility between North and South Korea.

European governments hoped that their unambiguous signal on Sunday night would calm investors... It hasn't happened. Read Robert's blog in full

An upward revision of estimated third quarter growth in the US also helped the dollar's rise against the euro.

Bank stocks were particularly badly hit, as many are heavily exposed to the debts of Ireland, Greece, Portugal and other struggling European economies.

Among the worst affected were those in France, where Societe Generale fell 4.7%, and Spain, where Santander also fell 4.7%.

In Ireland, where banks suffered the second day of sharp falls, Bank of Ireland slumped 23%, while Allied Irish Banks fell 19%.

Painful plans

Analysis The decorations are up for the festive rush at the Skycourt shopping centre in Shannon. But the ghost of Christmas future is haunting shoppers who fear that austerity measures will put a dent in their wallets. Uncertainty surrounds where the cuts will come from to pay for the estimated 90bn-euro rescue package - but that they will come is certain. The butcher's shop is already selling cheaper cuts of meat. The florist is predicting her toughest trading for 15 years. But there is a determination not to give in to doom and gloom. "Christmas is for children," said one mother of two. "And they do not need to know about the worries we all have." Irish Republic banks 'for sale' Irish leader battles for survival Greece must make 'extra effort'

Markets expect a 90bn-euro (£77bn; $122bn) bail-out for the Irish Republic from the IMF and European Union to be finalised in the coming days.

The four-year plan to be revealed on Wednesday is a precondition for the financing.

It will provide some detail of spending cuts and tax rises amounting to 15bn euros, including a hefty 6bn euros next year, with the aim of bringing the government's budget deficit down to a target of 3% of GDP by 2014.

It will also outline how Dublin intends to reform its banking sector which it has needed to inject with 45bn euros.

Some hints of the plan's contents have been provided by an IMF report on European economic reform that has been published on the Fund's website.

The IMF recommends that the Republic should gradually cut unemployment benefits the longer a person is out of work.

It also said the country should review its minimum wage - one of the highest in the eurozone - to bring it in to line with the general fall in wage levels.

The findings were approved for publication on Monday by the same senior IMF official who has been leading the team negotiating with the Irish government.

Political risk

The Irish Finance Minister Brian Lenihan said the plan had now been finalised and passing the budget was now the "priority" for the government.

"This budget is needed for Ireland. We need to pass this budget," he said.

But doubts remain as to whether the Irish government will survive long enough to pass its 2011 budget, with parliament due to vote on 7 December.

The Taoiseach, Brian Cowen, has agreed to a call from the government's junior coalition partner - the Green Party - to hold early elections in January once the budget has passed.

However, two independent members of parliament on whom the government relies for its majority have suggested they may not support the budget.

And opposition parties - Fine Gael and the Labour Party - have demanded immediate elections before the budget vote.

Contagion worry

Investors are also concerned that other countries with high levels of debt, in particular Portugal and Spain, may also have to seek financial help.

The interest rate the Spanish government had to agree to pay to raise short-term funds rose sharply at a bond auction on Tuesday. The yield on longer-term bonds also rose, reflecting these concerns.

The difference between the cost of borrowing faced by the Spain and Germany - which is considered a benchmark - also reached a record.

Fears were not helped by Germany's Finance Minister Wolfgang Schaeuble, who told his country's parliament that the future of the euro was at stake.

"I'd like to make clear that our joint currency is at stake and we have to take over responsibility. If we can't lastingly defend it jointly as a stable currency, the economic and social consequences would be incalculable," he said.

The bail-outs have proved unpopular among some parts of the German electorate, many of whom are struggling to understand why they are bailing out the economies of other European countries.