European stock markets mostly sank Thursday amid signs that debt market turmoil roiling Spain is threatening Italy, which is considered too big to bail out. A rally on Wall Street, where traders hoped for more stimulus from the Federal Reserve, helped limit losses.

Despite concerns in Europe, Greek stocks rallied hard on hopes that the election on Sunday would yield a government that would stick to the country's bailout terms and secure its membership in the euro currency union. The Athens index closed up a stunning 10.1 percent, with banks stocks leading the way.

Spain's 10-year bond yield — a key indicator of a country's creditworthiness — rose to near 7 percent, a euro-era record for the country, after Moody's downgraded the country by three notches. Madrid accepted up to 100 billion euros ($125 billion) in loans to rescue its banks, but investors are worried the government may be unable to repay the money.

Concern that Spain's market problems could destabilize Italy pushed Rome's own borrowing costs higher as well, despite Premier Mario Monti's assurances that Italy will not need a bail out.

The country paid a worryingly high 6.1 percent on 10-year bonds in an auction. Italy's overall debt is an enormous 1.9 trillion euros ($2.4 trillion), requiring frequent market access to repay investors whose bonds are expiring. To lower that debt, the economy needs to become more competitive, but it so far remains in a deep recession.

As market pressure ratcheted higher on Spain and Italy, European stocks fell. Germany's DAX fell 0.2 percent to close at 6,138.61 though France's CAC-40 edged 0.1 percent higher to 3,032.45. Britain's FTSE 100 lost 0.3 percent to 5,467.05.

Wall Street rose after official data showed U.S. inflation remained tame, boosting expectations that the Fed is closer to offering more support for the economy. The Dow Jones Industrial Average rose 1 percent to 12,616.71 while S&P 500 rose 0.9 percent to 1,326.20.

Dickie Wong, executive director of research at Kingston Securities Ltd. in Hong Kong, said he expects the Fed might renew its "Operation Twist" program under which it sells shorter-term securities and buys longer-term bonds to keep their rates down. The current program expires at the end of June.

The Fed has also done two rounds of bond purchases to try to lower long-term interest rates and encourage borrowing and spending.

"The market highly expects the Fed will take some steps to stimulate economic growth," Wong said. "Next week's Fed Open Market Committee meeting will be the last one before Operation Twist ends, so I think they will introduce some kind of new measure."

Earlier in Asia, Japan's Nikkei 225 index slipped 0.2 percent to close at 8,568.89. Australia's S&P/ASX 200 dropped 0.5 percent to 4,042.20. Hong Kong's Hang Seng shed 1.2 percent to 18,808.40 and the Shanghai Composite Index fell 1 percent to 2,295.95.

Despite concerns in Europe, Greek stocks rallied hard on hopes that the election on Sunday would yield a government that would stick to the country's bailout terms and secure its membership in the euro currency union. The Athens index closed up a stunning 10.1 percent, with banks stocks leading the way. Investors appeared to be reacting to market rumors of new public opinion polls, which cannot be openly released as Greek law forbids their publication in the last two weeks of campaigning.

"This week was always going to be a volatile one, and thus far it's playing out perfectly to script," said Cameron Peacock, IG markets analyst. "The Greek election will undoubtedly be seen as a landmark event in history, as it goes to the core of Greece's continuation in the eurozone and the fate of the region itself. "

If political parties are elected that favor reneging on the program — considered by many Greeks to have imposed intolerable hardships — the country's international bailout and its membership in the 17-nation euro currency union would be at risk.

Benchmark oil for July delivery was up 11 cents to $82.74 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell 70 cents to finish at $82.62 per barrel on the Nymex on Wednesday.

In currency trading, the euro fell slightly to $1.2569 from $1.2589 late Wednesday in New York. The dollar fell slightly to 79.21 yen from 79.33 yen.