The decision on Monday by Spain and Italy to reinstate short-selling bans has sent shockwaves through European markets once more, as investors fear that the worst of the sovereign debt troubles are far from over.

The two southern European powerhouses, who, along with Greece, have been causing the most angst to market participants as they struggle to keep their economies afloat, have seen shares on their markets plunge to their lowest levels this year as Spanish bond yields today also hit a euro-era peak of 7.52%, raising fears that Spain will be forced to seek a bailout similar to those taken by other troubled euro area economies.

“Given extreme volatility in European stock markets that could disturb the orderly functioning of financial activity, it is necessary to review stock markets’ operations in order to ensure financial stability,” Spain’s stock market regulator Comisión Nacional del Mercado de Valores (CNMV) said in a statement.

Hedge funds and other investors use short selling as a way to bet on falling share prices by borrowing stocks to sell them at a later date at the same price in the hope of pocketing the difference if the share price falls.

CNMV has banned short selling on all securities for three months to October 23 but says it may extend this for another three months, while Italy’s market regulator, Consob, has banned short selling on banking and insurance stocks until the end of this week. In Spain, the regulator said the ban, which will not apply to market makers, will encompass any stocks or indexes, including cash operations and derivatives on-exchange and over-the-counter. Naked short selling, where traders do not even borrow the stocks before selling them, is not allowed under Spanish and Italian rules.

“Given the recent turn of events on the market, Consob has decided to reintroduce the ban on short-selling stocks in the banking and insurance company sectors,” the Italian regulator said in a statement.

Short-selling of shares has been blamed for driving down markets during the financial crisis and several European regulators have in the past imposed temporary bans on the practice.

“Short-selling bans are a great indicator of further downside to come,” warned one London-based market source.

This week’s moves are similar to ones made by Spain and Italy, as well as France and Belgium, last August when trying to contain the last major flare-up of the eurozone debt crisis. However, most banks saw their declines magnify once the temporary short-selling bans were lifted. The U.S. Securities and Exchange Commission also banned the short selling of certain companies following the collapse of investment bank Lehman Brothers in September 2008, a move which was aimed at restoring confidence and preventing a big share sell-off.

Under proposals agreed earlier this year at the European Union, from November 1 the European Securities and Markets Authority (Esma), the pan-European regulator that was set up last year to harmonize the implementation of market rules across the EU, will be given more powers to impose such short-selling bans on some instruments and be able to implement any bans across all of the region’s markets. At present, national regulators can still impose their own independent rules.

“We are aware of the short-selling bans introduced by Spain and Italy,” David Cliffe, senior communications officer for Esma, told Markets Media.