Italy closed down 2.8 percent, Spain fell 0.5 percent, and yields soared in Spain and Italy as any enthusiasm vanished about a Spanish bank bailout.

Yields on 10-year Italian and Spanish bonds surged, passing important benchmarks and closing at 6.52 percent and 6.04 percent, respectively.

European markets had begun the day with an epic rally, but all major indices had erased gains by the end of the day.

The sell-off suggested that investors are less than pleased with the Spanish bailout, in particular the fact that lending from European bailout funds would likely subordinate government bondholders, even as Spain still attempts to tap the markets for funding.