The cost of protecting Irish government debt against default rose to 17-month highs on Monday, according to monitor Markit, a day ahead of sales of up to 1.5 billion euros ($1.93 billion) of Irish bonds.

Worries about the country's banking system also undermined sentiment. Central Bank Governor Patrick Honohan said the bailout of Anglo Irish Bank, which is partly behind the country's soaring budget deficits, is "costly but manageable."

Five-year credit default swaps (CDS) on Irish government debt climbed 20 basis points, or bps, on the day to 300 bps, a high last seen in March 2009, monitor Markit said.

This means it now costs 300,000 euros to insure an exposure of 10 million euros of Irish government bonds.

The premium investors demand to hold Irish government bonds rather than German benchmarks also rose with the Irish/German 10-year bond yield spread widening to 314 bps.