By Abhinav Ramnarayan
LONDON (Reuters) - Spanish stocks and government bonds sold off on Friday after Catalonia's parliament declared independence and the Spanish government moved to impose direct rule, deepening a political crisis.
"Tensions are likely to rise significantly over the coming days," Antonio Barroso of Teneo Intelligence said in a note.
"Demonstrators might try to prevent the police from removing Catalan ministers from their offices if the central government decides to do so. This increases the risk of violent clashes with the police."
The yield on Spain's 10-year government bonds -- which move inversely to price -- was up 2 basis points at 1.58 percent on a day when most other euro zone yields were sharply lower following Thursday's ECB meeting.
The gap between Spanish and German 10-year government bond yields widened 8 bps to 120 bps.
The cost of insuring exposure to Spanish sovereign and bank debt through credit default swaps (CDS) also rose.
Spain's IBEX (IBEX) share index fell as much 2.1 percent to a four-day low and euro zone banking shares (SX7E) as much as 1.8 percent.
"So far the political risk in Spain has played out predominantly in the IBEX, showing that investors consider it to be a domestic issue. However today, I think we are starting to see the negative sentiment also hit the euro," said Fiona Cincotta, an analyst at City Index.
The euro hit the day's low at $1.1574 and was down 0.6 percent on the day.
The European Central Bank's announcement on Thursday that it will extend its monetary stimulus programme until at least next September fuelled a broadly positive mood on euro zone markets.
Apart from Spain, most euro zone government bond yields were lower 5-7 bps, extending Thursday's falls. The yield on Germany's 10-year government bonds
For a graphic on Euro zone periphery government bond yields, click - http://tmsnrt.rs/2ii2Bqr