Financial markets were thrown into turmoil today amid fears that an imminent collapse of Ireland's beleaguered government would have a knock-on effect across the eurozone.

The announcement of the potential €90bn international bailout for debt-laden Ireland – of which the UK could contribute up to £10bn – offered only a temporary respite to nervous markets.

By tonight, concerns that Portugal and even Spain might also need their own rescue packages were rising and sent the euro and shares falling while the risk of holding the debt of potentially vulnerable countries rose alarmingly.

After a tumultuous day in Dublin, where protesters tried to storm the parliament building, the prime minister, Brian Cowen, defied calls for his resignation but conceded he would call an election in the new year. The move was forced upon him after the Green party pulled out of his fragile coalition government, unnerving markets on a day which was supposed to restore confidence in Europe's decade-old single currency.

Instead there was a sense of growing unease in the markets amid evidence that investors felt Portugal would not survive without aid., Dealers said sentiment in the markets was reminiscent of the days after the collapse of Lehman Brothers in September 2008.

Britain may be forced to join an EU bailout of Spain and Portugal after the government admitted today that it was powerless to veto an important element of the union's overall €750bn bailout package.

Under intense pressure from Eurosceptics, who are angry that Britain is having to rescue Ireland, the chancellor, George Osborne, admitted that a special €60bn European Stabilisation Mechanism could be activated against British wishes until 2013 if other eurozone countries run into trouble. The European Central Bank president, Jean-Claude Trichet, said: "Global finance and the global economy is extremely fragile. This is not a European crisis – it is a repercussion on Europe."

Markets were not reassured by the denials of the Portuguese prime minster, José Sócrates, that his country was in trouble and the cost of insuring its debt against default increased – the opposite to what the EU authorities had hoped would happen following the bailout for Ireland.

Cowen had called for unity on Sunday as he made his dramatic admission that the International Monetary Fund and the European Union had agreed to bail out Ireland and its crippled banks. His plea went unheeded and within 24 hours the Green leader, John Gormley, was demanding an election, saying Irish people felt misled and betrayed. "We have now reached a point where the Irish people need political certainty to take them beyond the coming two months," Gormley said.

But Cowen insisted tonight that Gormley was prepared to hold the government together long enough to pass the 7 December budget. The defiant taoiseach told reporters assembled on the steps on Ireland's parliament building that "we have got to get this budget passed". The plan to cut €15bn over four years is a crucial part of the negotiations with the IMF and EU bailout team.

Ireland's political and economic upheaval reverberated in London where Osborne admitted he had been in close contact with his Irish counterpart, Brian Lenihan, for weeks. The chancellor told MPs that "intensive private discussions" had been taking place with the G7, IMF and EU on plans for a bailout before the request from Dublin was officially made on Sunday, after a week of denials by the Irish authorities.

Osborne reiterated that it was overwhelmingly in Britain's national interest to help its "friend in need" and described the situation as one of "great difficulty" for Ireland. He told parliament the UK would participate in three ways to any bailout: through the IMF (likely to be about £1.5bn), the EU and also by providing a direct loan. Estimates for the cost to the UK were rising from £7bn to £10bn tonight. "Of course this is a loan, and we can expect to be repaid," Osborne said.

Analysts said the support was needed to prop up the UK's banks, which have extended £140bn of loans to Ireland. Osborne's willingness to support Ireland came as he prepared to backtrack on plans to demand the numbers of millionaires that banks employ each month.

Barely six months after the €110bn bailout of Greece, the Irish rescue deal did not stem concerns about the eurozone. Andrew Lim, head of financials research at Matrix, said: "Just as the rescue of Greece proved ineffectual in stopping contagion, we believe the confirmed aid package for Ireland will not prevent further deterioration of the sovereign debt crisis. The negative price action is particularly worrying, as it implies that the market has immediately wised up to the fact that the Irish rescue package will be ineffective for Europe as a whole.

"This is all about contagion to other parts of Europe. The markets are moving faster than the European politicians can keep up with," Lim added.

Stock markets across Europe tumbled. Spain's Ibex index was off 2.7%, Italy was down 1.2% and Ireland closed 1.4% while the FTSE was down 52 – about 1% – at 5680. Nick Parsons, head of strategy at National Australia Bank, said: "It's a day of buy the mystery, sell the history."Analysts use the cost that the markets charge to insure against a country defaulting on its debt as an indicator of distress. The cost of buying insurance on Portuguese debt rose and while Ireland initially enjoyed a reduction in its insurance costs, these had increased again by the end of the day. Ratings agency Moody added to the gloom by saying that it might cut the country's credit rating by more than it previously.

More market volatility is expected while the Irish package is still being negotiated and not expected to be finalised before the end of the month. The EU tried to shore up confidence in the eurozone. Olli Rehn, EU economic and monetary affairs commissioner, said: "Any talk of deconstruction of the European project is irresponsible. All member states would have been in a much more difficult situation without the European Union and its political shield. The euro is, and continues to be, the cornerstone of the European Union. It is not only a technical monetary arrangement, but it is indeed the core political project of the European Union."