Confidence in the eurozone was further eroded this morning as the cost of insuring government debt rose sharply to record levels, and the euro hit a 10-week low.

The financial markets continued to punish the peripheral members of the eurozone, with Spain, Italy, Portugal and Ireland all seeing their borrowing costs increase. Spanish and Italian bond yields showed the sharpest rises this morning, as Ireland's €85bn (£72bn) bailout failed to bolster confidence.

The euro fell more than a cent against the dollar, to $1.2982. And there were also worrying signs that blue-chip companies are suffering from the uncertainty, with the cost of insuring their debt also rising.

The market reaction to the Irish rescue deal shows that investors remain unconvinced the eurozone debt crisis can be stabilised, analysts explained, with many unwilling to buy European sovereign debt.

"In speaking to clients and traders yesterday, it's clear that there is extremely low appetite to take fresh peripheral or financial exposure. There are an increasing number of investors who will not touch these assets at any price for now, given all the uncertainty," said Jim Reid of Deutsche Bank.

"That's the worrying sign for those that think that a lot of these problems are overstated. You can have a well-articulated view on why xx or yy is solvent but if the buyers have completely dried up because of all the fear and uncertainty then micro analysis becomes secondary," Reid added.

Spanish 10-year government bond yields – the rate of return demanded by investors – rose by 19 basis points to 5.63%, while Italian 10-year bonds were up 13bp to 4.77%. The difference between the Spanish, Italian and Belgian 10-year bonds and their German equivalents all rose to their highest since the launch of the euro.

The cost of Spanish and Italian government debt remains much lower than that of worse-hit economies however. Irish 10-year bond yields stand at more than 9%, while yields on Greek 10-year bonds are almost 12%.

The cost of insuring Spanish debt for five years, using a credit default swap (CDS), rose by 22bp to 373bp, according to Markit data. This means it would cost €373,000 to insure €10m of Spain's debt.

Portuguese CDS also rose 22 points, to 560bp, while Irish CDS gained 13bp to 625bp and Greek CDS gained 18bp to 970bp.

The more stable members of the eurozone also came under pressure – Belgian CDS rose 13 points to 195bp, French CDS were six points higher at 105bp, and even German CDS rose – up six points to 57bps.

At the corporate level, Markit's iTraxx Europe Index of 125 companies with investment-grade ratings showed a 6.5 basis-point rise in the cost of their credit default swaps, to 120bps. That is its highest level since July. Gavan Nolan, Markit analyst, said this showed the "contagion spreading to corporates".

Too big to bail?

An initially positive reaction to the weekend's Irish bailout soured yesterday, with the FTSE 100 index down by more than 100 points.

Russell Jones, global head of fixed-income strategy at Westpac Banking Corp, said there were signs that Italy and Belgium were being "sucked into the mire". He warned that Italy – a member of the G7 – was a particular concern. "If Italy got dragged down, all bets are off for the eurozone, frankly," Jones told Bloomberg TV.

Gary Jenkins of Evolution Securities added that both Spain and Italy have an imminent need to raise large amounts of debt: "Spain has a funding requirement in excess of €150bn for 2011 and Italy needs close to €340bn. With the market moving rapidly on to Spain and Italy it is possible that too big to fail becomes too big to bail."

Many analysts were focused too on what will happen if bond yields keep rising, forcing EU leaders to take action to fundamentally reshape the eurozone.

Arturo de Frias, head of banks research at Evolution Securities, said that the removal of weaker economies from the euro might not be viable: "German, French and UK banks have €1.2tn exposure to European periphery economies. If all these economies devalue by say 30% on their way back to the peseta, lira, escudo, etc, these banks would suffer €400bn of losses – and these would be final, definitive losses. There is absolutely no way the German, French and UK governments will accept €400bn additional definitive losses at their banks."

He suggested that a fiscal union was a more likely scenario: "A 'European Union bond' is needed in order to save the euro (ie fiscal union is required to save the monetary union)."

The UK's stock market was up initially today despite the European debt fears, but had fallen back by lunchtime.