Media playback is unsupported on your device Media caption Commissioner Olli Rehn: "I'm relieved to see member states taking swift action"

European shares have been volatile on fears that the debt crisis in the eurozone may spread to Italy and Spain.

Italy's main index fell 4% at one point, before recovering to rise 1.2%. Spanish shares fell 0.7% and the UK's FTSE 100 shed 1%.

The yields on Italian and Spanish bonds also continued to rise as worries over the two countries grew.

After the European markets closed, ratings agency Moody's cut the Irish Republic's debt rating to junk status.

Moody's said its decision was based on the "growing possibility" that the country would need a second bail-out before it can return to capital markets.

The move also sent US stocks lower - they had been trading up prior to the announcement but the Dow Jones fell 0.5% at the close and the Nasdaq dropped 0.7%.

Extra summit?

On Monday, eurozone finance ministers said they were ready to pass new measures to stop the crisis spreading.

They met in Brussels again on Tuesday, this time with their colleagues from European Union nations that do not use the euro.

Diplomats have said that a meeting of leaders of the 17 eurozone countries was being considered for Friday.

European Council president Herman Van Rompuy said a summit "has not been excluded", while EU Economic Affairs Commissioner Olli Rehn declined to comment on the possible meeting.

But Mr Rehn said he was "relieved to see our member states now taking swift action to face any weaknesses".

'Contagion risk'

The euro was also lower, falling to a four-month low against the dollar at $1.3835.

The concern is that Italy and Spain may have to follow Greece, Portugal and the Republic of Ireland and seek a European Union and International Monetary Fund (IMF) bail-out.

We find ourselves at one of the worst moments of the European monetary crisis Jean-Francois Robin, French investment bank Natixis

On Monday, eurozone finance ministers said increased efforts to "improve the euro area's systemic capacity to resist contagion risk" would include "enhancing the flexibility and the scope" of the European Financial Stability Facility (EFSF).

This is the bail-out fund to which eurozone member states contribute.

Finance ministers also agreed to look at lowering the interest rates that Greece, Portugal and the Irish Republic have to pay, plus lengthening the maturities of their loans.

"Ministers reaffirmed their absolute commitment to safeguard financial stability in the euro area," the finance ministers said in a statement after eight hours of talks in Brussels.

Italian cuts

Concern that Italy could be the next country to require a financial bail-out comes as Italy's Finance Minister, Giulio Tremonti, left Tuesday's talks early so he could continue to work on an austerity budget to reduce Italy's public deficit.

He has proposed 48bn euros ($67bn; £42bn) in budget cuts over three years and aims to cut the deficit to zero by 2014 from this year's 3.9% of gross domestic product.

Analysis Italian and Spanish borrowing costs are continuing to rise, and stock markets are continuing to fall. Politicians are talking about panic in the markets and deliberate financial speculation. But until they give a clear lead on how they intend to deal with the next phase of eurozone debt problems, particularly in Greece, then the sense of crisis will not dissipate. The eurozone does now seem to be moving towards the idea that some form of default in Greece may be needed to help Athens cut its debts, as part of a second big financial bailout. But the only promise is that decisions will be made shortly - and the lack of certainty continues to provoke anxiety.

However, financial markets were unsettled by earlier remarks from Prime Minister Silvio Berlusconi, who indicated in a newspaper interview that the austerity plan might not have full cabinet support.

Shares in Italian banks were down sharply in early trading, with Intesa SanPaolo losing 4% and UniCredit heading 7% lower.

However, both then rebounded after the Italian government announced a successful sale of 12-month bonds, albeit at a high price.

Intesa rose 3.3% and UniCredit was up 5.9% on the day, while Italy's main share index, the FTSE MIB, reversed earlier losses.

Rising yields

Yet in a sign that investors remain more risk-averse to Italy, the yield on Italian 10-year bonds on Tuesday increased to 5.8% from 5.6% on Monday.

Meanwhile, yields on 10-year bonds issued by the Spanish government rose to 6.3%, from 6.1%.

Analysts say both these yields are now close to levels at which the two countries will have problems servicing their debts.

Asian shares had earlier closed lower, with the situation in the eurozone being closely monitored around the world, with Japan's Nikkei index and Hong Kong's Hang Seng both falling 1.4%.

Jean-Francois Robin of French investment bank Natixis said: "We find ourselves at one of the worst moments of the European monetary crisis.

"The idea of a contagion from the Greek crisis to other eurozone countries like Italy and Spain is gaining ground."

On Monday, eurozone finance ministers also discussed how, and by how much, banks and other financial institutions could contribute to a new rescue package for Greece.

However, no final decision was reached on this, as it also has to be agreed with the IMF.

Speaking from Washington, IMF managing director Christine Lagarde said it was not yet ready to discuss terms for a second Greek bail-out.

"Nothing should be taken for granted," she said.