Jin Lee, Associated Press
In this Aug. 4, 2011 photo, a trader works on the floor of the New York Stock Exchange. Global stock markets tumbled Friday, Aug. 5, amid fears the U.S. may be heading back into recession and Europe's debt crisis is worsening. The sell-off follows the biggest one-day points decline on Wall Street since the 2008 financial crisis.

FRANKFURT, Germany — Europe's debt crisis and fears over the U.S economy battered markets once again Friday, challenging vacationing European leaders to find a way to keep the turmoil from pushing Spain and Italy to financial collapse and further hobbling an already-waning global recovery.

Following a day of mayhem in the markets, which saw the Dow Jones index on Thursday suffer its worst day since the end of 2008, stocks have tumbled further Friday across Europe, following an earlier slide in Asia, as investors fret over the growing threats to growth.

European leaders face the prospect that Italy and Spain won't be able to pay down their debt mountains, while the U.S. administration is slashing spending by $2.4 trillion over the next ten years even though many economic commentators think the world's largest economy could sink back into recession.

In Europe, Italian and Spanish bonds traded at levels that threaten those countries ability to raise money in the bond markets to pay off debts.

The yield, or borrowing costs, for both have risen above 6 percent, approaching the levels that drove much smaller Greece, Portugal and Ireland to seek bailouts from the eurozone and the International Monetary Fund.

A key moment for markets will be the release of U.S. jobs data later. Nonfarm payrolls are expected to rise by around 90,000 in July. Anything disappointing could deepen the slide and reinforce worries about a repeat of the meltdown of October 2008, after the collapse of U.S. investment bank Lehman Brothers shook the global financial system.

German Chancellor Angela Merkel, vacationing in the Italian Alps, and French President Nicholas Sarkozy, on the French Riviera, are interrupting their summer holidays for a phone conference on the eurozone crisis, Merkel's office said.

Sarkozy's office said he would also speak with Spain's Prime Minister Jose Luis Rodriguez Zapatero.

The worry is that Europe's debt crisis is spiraling out of control as investors lose faith in the ability of countries to get a handle on their debts and in the whole European decision-making process.

That's pushed up borrowing costs, particularly for Italy and Spain. Italy's ten-year bond yield is now running above Spain's for the first time since May 2010 in a clear sign that investors think the eurozone's third-largest economy is in trouble.

Fears that a country may default drive up the interest yields on its bonds. That can become a vicious spiral as the higher rates increase the debt and frighten away even more bond investors.

European leaders face few and difficult options. They gave their €440 billion rescue fund new powers to prop up bond markets and rescue banks at a July 21 summit, but the changes are not in effect yet because national parliaments have not approved the measures yet.

That leaves the European Central Bank, which can buy government bonds under emergency powers but has done so only reluctantly because it does not want to be seen as supporting shaky government finances.

On Thursday, the ECB restarted its bond-buying program by making limited purchases of Portuguese and Irish bonds.

Luc Coene, the head of Belgian's central bank and a member of the ECU, told Belgian radio station RTBF that the bank was reluctant to buy Italy and Spain's until the two countries have taken additional steps to cut deficits.

Otherwise, "it's like pouring water into a bucket with a hole," Coene said.

Coene also said without stricter rules on national deficits and debt, the euro is not viable in the long-term. European officials are working on a tougher set of rules to keep governments from overspending but the European Commission and parliament have not agreed on them yet.

Leaders could increase the size of the bailout fund, but that was rejected by leaders at the summit due to resistance from Germany and other countries with solid finances to having their taxpayers on the hook for overspending by others.

A longer-term option would be a eurobond whereby the 17 members of the currency union borrow jointly. That has so far firmly been rejected by Germany and others with strong finances that let them tap bond markets cheaply, and who would see borrowing costs go up.

Greek Prime Minister George Papandreou, who has long proposed the idea of eurobond, said in a letter to the head of the European Commission, Jose Manuel Barroso, that leaders need to act quickly "so that we always are ahead of developments and not behind them."

Commerzbank economists said that for now the ECB appeared the only line of defense against a nightmare ending.

If Spain and Italy cannot borrow after the summer break, he said, they will have to slash spending because they can no longer finance deficits, leading to a profound recession and possibly runs on those countries' banks.

"The foundations of economic activity would be undermined and euro area GDP would collapse, possibly on the same scale as in the winter of 2008-2009 following the Lehman bankruptcy," they said.

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They assumed the eurozone governments will halt that by expanding the bailout fund or implementing eurobonds, with the ECB possibly stepping in to stabilize bond markets with much larger bond purchases, even if that meant printing money to finance government spending.

"If... finance ministers failed to act in time, the ECB might bridge the gap via massive bond purchases even if this were tantamount to financing government spending with fresh money," they said in a report.

Currently, the central bank has drained money from the financial system when it buys bonds to ensure that its purchases do not expand the supply of money in the economy.

Gabriele Steinhauser in Brussels, Melissa Eddy in Berlin and Derek Gatopoulos in Athens contributed to this report.