European stocks fell for a third day after a sale of short-term Spanish debt exposed the highest borrowing costs so far this year for Europe's fourth-largest economy.

The €3bn sale, which came only hours after a wholesale downgrade of its banking sector by Moody's Investors Service which left only seven of its 28 financial services firms with investment grade ratings cost the Spanish Treasury more than double what it paid in a similar auction last month.

The auction comes amid a raft of negative news for the European economy, including a record annual fall in retail sales in Italy and a surprise increase in public borrowing here in the United Kingdom.

The European single currency fell to a two-month low against the yen and gave back earlier gains against the US dollar and the Pound following the sale.

Investors were also unnerved by a formal request for financial assistance by Cyprus. The smallest economy in the Eurozone will become the fifth member to accept a bailout – in this case as much as €10bn – only days before it's due to take over the EU Council Presidency.