LONDON -- The debt crisis in Europe escalated sharply Friday as investors dumped Spanish and Portuguese bonds in panicked selling, substantially heightening the prospect that one or both countries may need to join troubled Ireland and Greece in soliciting international bailouts.

The draining confidence in Western Europe's weakest economies threatened to upend bond markets, destabilize the euro and drag out the global economic recovery if it is not quickly contained. It also underscored the mounting problems facing countries that during the past decade have both over-borrowed and overspent, and are now in danger of losing investor faith in their ability to make good on their massive piles of debt.

The perceived risk of debt defaults in Portugal and Spain drove their borrowing costs to near-record highs Friday, with the interest rate demanded on Portuguese bonds at a point where it could effectively cut the Lisbon government off from raising fresh cash to run the country.

As a result, Portugal was coming under pressure to immediately request a bailout from the European Union and International Monetary Fund. Officials in Lisbon responded by pushing through a painful round of budget cuts meant to reassure investors and rejected claims that they needed an emergency lifeline. Italian and Belgian borrowing costs also rose Friday.

The bigger fears, however, surrounded eroding confidence in Spain, whose faltering economy is more than twice the size of the Greek, Irish and Portuguese economies combined - meaning that a bailout there could run into the hundreds of billions of dollars.

Coupled with the pending bailout for Ireland and possibly Portugal, analysts said, a Spanish rescue could severely deplete the $1 trillion stability fund set up by the E.U. and IMF this year to contain the crisis. That could complicate the E.U.'s ability to mount a defense if another member nation were to need assistance.

At the same time, it remained unclear whether the stronger members of the 16 euro countries - particularly Germany, the region's economic powerhouse - are willing to dig deeper into their pockets to help shore up their troubled neighbors.

German officials were sending mixed signals. Axel Weber, president of Germany's central bank, suggested Thursday that the stability fund could be beefed up if needed. But on Friday, other German officials balked at the notion. Investors have also been rattled by a German proposal to have bond holders around the world - who have thus far effectively been guaranteed against losses - absorb some of the financial pain for future bailouts.

"There is neither a reason to consider [more funds] now, nor have there been any efforts by the European Union or by other parties to discuss this issue with the federal government," Steffen Seibert, spokesman for German Chancellor Angela Merkel, told reporters in Berlin. "This is a non-issue at the moment."

Depending on the severity of the crisis, the fallout for the United States could be relatively limited. U.S. banks hold about $133 billion in debt from Ireland, Spain, Portugal and Greece, only slightly more than banks in tiny Belgium. By comparison, German banks are liable for $515 billion, and French banks for about $400 billion.

A greater danger is that a full-blown debt crisis in Europe could put new pressure on the region's banks, tightening credit and potentially slowing growth in one of the world's largest economic engines. It could also send the euro plunging against the dollar, making the greenback stronger on world markets and undermining the efforts of the Obama administration to boost U.S. exports overseas.

"For now, the U.S. is kind of insulated," said Simon White, a partner at the London-based research firm Variant Perception. But whether it stays that way, he said, "depends on how deep the crisis goes."