European commission president says Brussels must be able to impose tax and spending controls on member states

Global financial markets prepared for the euro's endgame after the sovereign debt crisis spread to Germany, the "stability anchor" of the single currency, and investors shunned its government bonds.

Europe's biggest economy suffered what analysts called a "complete and utter disaster" as it managed to sell only two-thirds of its 10-year bonds at auction. "It's a vote of no confidence in the entire eurozone," one said.

Stock markets slumped, the euro fell to a recent low and France came under renewed pressure after it emerged it could be forced by Belgium to pump more emergency aid into rescued lender Dexia. Both countries were forced to deny reports that a €90bn restructuring plan for Dexia was being renegotiated.

Fears of a new credit crunch were heightened by reported problems at Belgian lender KBC and a €10bn (£8.6bn) requirement for fresh capital at Germany's bigger banks.

Paris was again warned – by the Fitch agency – that the country could soon lose its triple A credit rating if the debt crisis and economic downturn deepened. Yields on key eurozone sovereign bonds, including Germany's, rose in tandem, with Italy's back above 7% in late afternoon trading.

Amid widespread investor anxiety about the future, the European commission president, José Manuel Barroso, admitted that it would be impossible to save the euro unless eurozone countries agreed to strict controls from Brussels and the European Central Bank in their tax-and-spend policies.

German government officials tried to play down the scale of the abortive Bund auction, pointing to the lowest rate – 1.98% – ever recorded for such a long-term bond. A finance ministry spokesman said the abortive auction did not mean the government has refinancing problems.

But the federal finance agency (debt office) was forced to retain almost €2.4bn of the planned €6bn sale "for another day" and analysts said the weak demand indicated that eurozone contagion was now afflicting even Europe's strongest economy or what FT Alphaville calls "the only first-class passenger on the Titanic".

Fears are growing among investors that, even with its implacable opposition to eurobonds and large-scale intervention by the ECB to buy state bonds, the German government could be forced to increase guarantees for other eurozone countries in trouble. "More and more big institutional investors have prejudices against German state bonds," Eugen Keller, of Bankhaus Metzler, told Spiegel Online.

Markets were further unsettled by evidence that billions of euros are being withdrawn by global investors from European equities and bonds.

Barroso, bristling with impatience, exasperation and anger, had earlier made his remarks on the euro's survival at a Brussels news conference to launch a "green" paper on so-called stability bonds – common eurozone debt instruments for pooling sovereign risk. He was forced to spend most of his time defending his proposals in the face of the latest flat "nein" from Berlin where the chancellor, Angela Merkel, ridiculed the notion of eurobonds as "extraordinarily inappropriate" and reiterated opposition to large-scale intervention by the ECB as lender of last resort.

Repeatedly insisting that the stability bonds were a work-in-progress, Barroso tried to placate Germany by insisting they could only come – if at all – with stricter central and national controls over fiscal policy, substantial structural reforms and greater economic convergence.

"Without stronger economic governance it will be difficult, if not impossible, to sustain the single currency," he told journalists as he set out proposals for "enhanced surveillance" of national budgets in eurozone countries. This includes a plan for the adoption of UK-style offices for budget responsibility.

Barroso insisted that proposals enabling Brussels to send back draft budgets that did not meet with its approval or conform to stricter criteria in the EU's stability and growth pact did not amount to a commission veto or erosion of democratic parliamentary sovereignty. He called for pooled democratic sovereignty rather than "handing over real sovereignty to markets and speculators".

Under two new draft regulations, a combination of the EC and other governments could force a country in financial distress to seek aid. It would only escape "enhanced surveillance" when it had paid back 75% of any loans.

Setting out three options for stability bonds, both he and Olli Rehn, the EU economic and monetary affairs commissioner, agreed that the one offering "joint and several" guarantees for pooled sovereign bonds would require the most substantial treaty change.

"Stability bonds will not solve our immediate problems and will not replace the reforms needed in countries under pressure," Barroso said.