Borrowing costs for Italy and Spain have risen after the European Central Bank delayed a decision to restart a bond-buying programme.
ECB President Mario Draghi told a news conference in Frankfurt that it will consider buying up debt in the open market "in coming weeks", but the details are still being worked out.
He also called on governments to allow the bailout funds to buy up bonds issued by struggling countries when they need to raise cash to pay their bills.
Mr Draghi confirmed that such large-scale interventions would be considered only if the countries commit to 'fiscal consolidation'- in other words, more austerity.
That is likely to anger the governments in Rome and Madrid who were hoping for a 'big bazooka' to tackle their borrowing costs.
Mr Draghi also rejected proposals to give a banking licence to the permanent bailout fund, known as the ESM, which he said wouldn't be legal under the Maastricht treaty.
It follows a unanimous decision by the ECB governing council to keep its key interest rate unchanged at 0.75%, after reducing it by 25 base points last month.
After the ECB's press conference the European markets plunged, with Spain's Ibex ending the day down by 5.16% and Italy's Mib dropping by 4.64%.
Meanwhile the FTSE dipped to close down 0.88%, the Dax was down 2.2% and the Cac fell 2.68%.
Spanish 10-year bond yields also shot up, surpassing the dangerous level of 7%.