Europe's struggle to deal with its debt crisis came under increasing strain Tuesday as political infighting in Ireland threatened to delay a massive bailout and bond market jitters shook Portugal and Spain.

Rebels from Irish Prime Minister Brian Cowen's own party pressed to oust him and opposition leaders demanded an election before Christmas.

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The main index on the stock exchange in Madrid sank 3.1 per cent Tuesday as borrowing costs for Spanish government debt soared. ((Paul White/Associated Press))

Despite the discontent, Cowen's cabinet colleagues in the Fianna Fail party said they were confident the rebels have too few votes to pursue a non-confidence motion.

At stake is the backstop for Irish banks worth as much as 100 billion euros ($137 billion) from the European Union and International Monetary Fund.

In Strasbourg, France, Olli Rehn, the EU's monetary and financial affairs minister, warned that the infighting must stop long enough to pass the government's 2011 budget.

"It is essential that Ireland pass the budget in the timeline foreseen, and sooner rather than later, because every day that is lost increases uncertainty," Rehn said.

Fear of contagion grows

That uncertainty drove up borrowing costs Tuesday for Portugal, Spain, Greece and Italy, all of which face mounting debt-financing struggles.

The nations' borrowing costs rose, suggesting investors are more worried about default, while Spain limited the size of a bond sale because traders demanded sharply higher premiums.

Stock traders panicked and dumped shares across all sectors, sending Portugal's benchmark stock index down 2.2 per cent by the close, while Spain's sank 3.1 per cent to a level not seen since July.

The euro slid below $1.34 for the first time in two months. By early afternoon in North America, it was at 1.3398 to the U.S. dollar, down 1.7 per cent from Monday.

With files from The Associated Press