GLOBAL MARKETS-Deepening euro crisis hits stocks, bonds, euro

* Euro zone debt fears hit euro, bonds and stocks

* European shares down 1.5 percent

* Oil hit by demand concerns

By Neal Armstrong

LONDON, July 12 (Reuters) - Investors dumped the euro,
peripheral euro zone government debt and European shares on
Tuesday as officials struggled to contain fears that the euro
zone debt crisis was spreading to Italy and Spain.

In a bid to keep Italy and Spain from the same fate as
Greece, Portugal and Ireland, euro zone finance ministers
promised on Monday cheaper loans, longer maturities and a more
flexible rescue fund.

But markets came under pressure as they set no deadline, and
Dutch Finance Minister said a selective default for Greece was
no longer being excluded.

"Italy and Spain have been thrown into the mix, and they are
far bigger in magnitude than Greece, Ireland and Portugal. This
could be a true systemic crisis," said Andrew Lim, analyst at
Espirito Santo in London.

There was some respite for Italian assets after speculation
swirled that the European central bank was buying Italian and
Spanish paper, even though traders who usually see those
transactions said they had seen no evidence of such trades.

The costs of insuring against a default by the euro zone's
peripheral issuers hit record highs, and Italian and Spanish
bond yields spiked higher.

Italian 10-year government bond yields broke
above 6 percent for the first time since 1997. Traders said a
move towards 7 percent could be a tipping point for bond yields,
making the cost of refinancing unsustainable.

Italy's short-term borrowing costs jumped in the first test
of appetite for its paper since the recent surge in investor
nerves.

"Italy is by far the country with the greatest sensitivity
to rising debt servicing costs and particularly in terms of
rolling over debt," said Mark Ostwald, strategist at Monument
Securities.

"This is not a situation which it can afford to have going
on for any sustained period of time."

The euro hit four-month lows of $1.3837 and fell to a
record low against the safe-haven Swiss franc .

"Italy has moved very, very quickly to catch up with Spanish
yields, and the market has woken up to the fact that there's a
much larger problem. That's what precipitated the large fall (in
the euro)," said Adam Myers, senior FX strategist at Credit
Agricole CIB

European shares also came under pressure, with bank stocks
slumping more than 3 percent to two-year lows.

Brent crude oil futures fell 2 dollars on fears about
slowing energy demand. LCOc1 World stocks and U.S. equity
futures were down about 1 percent heading into U.S. trade.
.SPc1

(Additional reporting by Steve Slater and Naomi Tajitsu;
Editing by Hugh Lawson)