BERLIN — The German economy, which has been a bastion while its neighbors have buckled one by one under debt, showed signs of strain Wednesday and raised fears across world financial markets that Europe is far from containing its crisis.
An auction of bonds by the German government flopped, generating some of the weakest demand in a decade. And investors who buy German bonds on the open market demanded higher yields, a sign of concern about Germany's finances.
Compounding the problems for Europe, France received another warning that it might be stripped of its top-notch credit rating, and borrowing costs for Italy neared dangerous levels.
German Chancellor Angela Merkel and the head of the European Union clashed openly over one proposed solution to the European crisis — common bonds issued by all 17 nations that use the euro currency.
A European bond could promote stability in the markets. But Merkel said it would not solve "structural flaws" with the euro, and, in a testy exchange, an EU official said Merkel was trying to cut off the debate before it could even start.
While European leaders bickered and the bond market fretted, investors sold stocks all over the world. In New York, the Dow Jones Industrial Average lost 236 points, more than 2 percent. Stock markets across Europe finished more than 1 percent lower.
"If Germany can't sell bonds, what is the rest of Europe going to do?" asked Benjamin Reitzes, an analyst at BMO Capital Markets.
The debt crisis in Europe has already forced Greece, Portugal and Ireland to accept international bailouts, and it has threatened Italy and Spain, which have much bigger economies.
But Germany had weathered the storm. It has the largest economy in Europe, with $3.3 trillion of output last year, or about 20 percent of the EU economy. It is vital to any continent-wide solution, both as a source of strength and as a source of cash.
Germany had hoped to raise $8.1 billion by selling bonds, but it sold only $5.9 billion, one of the worst showings since the adoption of the euro in 1999.
German officials cited a record-low offered yield and a nervous market for the auction's failure, but investors took it as a warning that the crisis might threaten the rock-solid German economy.
Greece, meanwhile, took a step forward in avoiding bankruptcy after the conservative party leader pledged to back the conditions attached to a new financial aid package.