PORTUGUESE Prime Minister Pedro Passos Coelho's government is close to collapse after two top ministers quit, pounding financial markets in Lisbon and across Europe.
Markets reacted severely after Foreign Minister Paulo Portas resigned Tuesday evening, a day after the shock departure of Finance Minister Vitor Gaspar.
EU officials told Portugal to take its responsibilities and clarify the situation "as soon as possible".
The crisis in recession-wracked Portugal spread fears in world markets of a new wave of instability from the bailed-out nation on the eurozone's debt-laden periphery.
The yield on benchmark 10-year Portuguese government bonds spiked above eight percent for the first time since November 2012, hitting 8.023 percent before easing a little. It closed the previous day at 6.720 percent.
The sharp rise in the bond yield is a warning that the government may have to pay exorbitant rates if it wants to sell newly issued bonds to the financial markets.
The Lisbon stock exchange's key PSI-20 index plunged 6.55 percent to 5,168.20 points in morning trade.
As concern spread, Madrid's IBEX 35 index slumped 3.15 percent to 7,638.2, London's FTSE 100 fell 1.64 percent to 6,200.66 points, Frankfurt's DAX 30 slid 1.93 percent to 7,757.78 points and in Paris the CAC 40 tumbled 1.70 percent to 3,679.03.
The euro fell to $1.2923 - hitting a low last recorded on May 29. That compared with $1.2978 late in New York on Tuesday.
Investors were unconvinced by the Portuguese premier's vow to stay on.
"Portugal, under severe economic pressure from a lack of growth, a bloated public sector and more than a decade on non-growth, most likely will see its government fall inside the next 48 hours, despite assurances from Prime Minister Pedro Passos Coelho that he will not resign," Saxo Bank chief economist Steen Jakobsen said.
"The coalition is falling, and falling soon," he said in a report.
Jakobsen said he expected a new election to be called with a huge drive against austerity measures.
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