LONDON (Bloomberg) — European stocks dropped, extending the third straight weekly loss for the Stoxx Europe 600 Index, amid mounting concern about the sovereign-debt crisis and escalating tensions between North and South Korea.

Banco Santander SA slumped 3.7 percent, pacing a selloff in Spanish lenders. Rio Tinto Group fell 2.1 percent, leading basic-resource stocks lower. Givaudan SA, Luxottica Group SpA and Puma AG each slid more than one percent as Morgan Stanley recommended that investors reduce their holdings of the three stocks.

The benchmark Stoxx 600 fell 0.4 percent to 266.60 at the 4.30 p.m. close in London. The gauge has dropped 1.1 percent this week, the biggest drop in almost two months, as investors speculated that the region will fail to contain its debt crisis after Ireland became the second euro-area nation to request an international bailout.

"There's a combination of negative news that is burdening the market today," said Christian Falkner, an analyst at Alpha Wertpapierhandels AG in Frankfurt. "On the one hand, statements from Kim Jong Il about the likelihood of a war in Korea and on the other hand speculation that Portugal may be urged to tap the European Stability Fund. Investors are also worried about inflation in China. Financial shares are especially hurt today."

The VStoxx Index, which measures the cost of protecting against a decline in shares on the Euro Stoxx 50 Index, surged 12 percent to 28.44. The gauge has climbed 29 percent this week, the biggest gain since May.

The MSCI Asia Pacific Index retreated 1.3 percent as North Korea warned that South Korean military exercises with the U.S. will take the peninsula to the "brink of war," according to state news agency KCNA. North Korea threatened a "shower of terrifying fire" should the US or South Korea infringe its sovereignty.

Chinese stocks fell for the first time in three days, led by banks and developers after Shanghai Securities News said the government may cut the target for new lending next year.

Chinese policy makers have stepped up measures in recent weeks to curb inflation that reached 4.4 percent last month, the fastest pace in two years. Analysts at nine banks surveyed by Bloomberg News last week predicted the central bank will boost borrowing costs for a second time by the end of the year.

Portuguese Finance Minister Fernando Teixeira dos Santos said European Union governments can't impose a bailout on his country even as speculation mounts that Portugal will eventually have to ask for one.