LONDON — Market gloom prevailed Monday at the start of a crucial week for the euro, as Spain made a formal application for billions in aid for its sickly banks and European leaders prepare for talks over the creation of a European banking union to shore up the currency.


Stock markets and the euro dropped amid pessimism that European Union leaders, who are due to meet Thursday and Friday in Brussels, will achieve the far-reaching breakthrough needed to resolve the debt crisis.


“This will be a decisive week for Europe,” the German foreign minister, Guido Westerwelle, said Monday at a meeting of European Union foreign ministers in Luxembourg.


The Euro Stoxx 50, a measure of European blue-chips, was down 1.86 percent in mid-afternoon trading in Europe. National benchmarks were also down, led by the MIB in Milan, which was down 2.81 percent, and the Ibex 35 in Madrid, down 2.41 percent. The DAX in Germany was off 1.63 percent, and the CAC 40 in France was down 1.82 percent.


The euro was at $1.2493 in early afternoon trading in Europe, down from $1.2560 late Friday in New York.


Asian stocks were also lower Monday, with the Nikkei 225-stock index in Japan down 0.72 percent and the Hang Seng index in Hong Kong down 0.51 percent.


Spain’s formal request for up to 100 billion euros, or $124 billion, in aid for its banks left the door open for further talks about how the European money should be disbursed, underlining recent efforts by Madrid to pressure its European counterparts into allowing its banks to receive the money directly, rather than adding to Spain’s sovereign debt by going to the Spanish government, as current European Union rules require.


E.U. leaders may discuss whether to change those rules at their meeting in Brussels at the end of the week, at which they will also debate a plan to wind up insolvent banks, a central deposit guarantee fund and a bigger supervisory role for the European Central Bank, among other measures.


The issue of bank regulation highlights the threat posed by the so-called doom loop at the heart of the euro zone, in which the weak finances of banks and governments on Europe’s periphery drag each other down.


An outline agreement to bail out Spanish banks, struck earlier this month, failed to impress financial markets because the loans from the euro zone rescue fund will, under the current rules, only add to the debt of Spain’s government.


Another euro zone country with banking sector problems, Cyprus, was downgraded Monday to junk status by the rating agency Fitch. The tiny island nation is expected to seek international aid, though possibly from Russia rather from its E.U. partners.


In his formal request for banking aid, the Spanish economy minister, Luis de Guindos, said in a letter Monday to Jean-Claude Juncker, head of the Eurogroup of euro zone finance ministers, that the final amount of the financial assistance would be set at a later stage.


Audit reports released last week indicated that Spain will need as much as 62 billion euros to shore up a banking system brought low by a real estate crash.


Mr. de Guindos also confirmed his intention to sign a memorandum of understanding for the package, which would include full details, by July 9, in time for the next meeting of euro zone finance ministers.


Olli Rehn, a vice-president of the European Commission responsible for economic and monetary affairs, welcomed the request from Spain, saying he was confident a detailed agreement could be reached “in a matter of weeks.”


Spain expects finance ministers from the 17 euro zone countries to set the terms of the loan, such as the interest rate, at their meeting on July 9. It then expects the results of more audits of its banks by the end of July and may not specify a final figure until September.


In effect, Spain is happy to drag out its bank rescue in order to let the idea of a European banking union ripen and in the hope that, by the time the funding is provided, it can be paid directly into the banks — whatever the current rules say now.


In the meantime, Spanish borrowing costs have hovered near record highs of around 7 percent for long-term debt, a figure which the government in Madrid would not be able to sustain in the medium term without seeking a full bailout. Italian borrowing costs also rose last week on fears that Italy would be the next country to seek aid.


On Monday afternoon the benchmark Spanish 10-year bond traded to yield 6.454 percent, up 20 basis points, while the comparable Italian bond was at a yield of 5.886 percent, up 11.2 basis points. A basis point is one-hundredth of a percentage point.


Italy’s prime minister, Mario Monti, has proposed a plan to limit the difference between the lending costs of the euro zone nations, deploying the resources of the euro zone bailout fund and the European Central Bank. Germany’s chancellor, Angela Merkel, refuses to do that without first constructing a fiscal union that would give Brussels more say in how the Italians and others spend their money.


The summit at the end of this week is also expected to debate a relaxation of the bailout terms already negotiated by Greece. But the country’s newly installed prime minister, Antonis Samaras, and his nominee for the crucial post of finance minister, Vassilis Rapanos, were hospitalized Friday and will miss the summit.


Mr. Samaras, who left the hospital Monday and is recovering from eye surgery, and Mr. Rapanos, who was being treated for intense abdominal pain, nausea, sweating and dizziness, will be replaced at the meeting by a ministerial delegation.


Representatives of Greece’s so-called troika of foreign creditors have postponed a trip to Athens that was scheduled for Monday. A European Commission spokesman, Amadeu Altafaj, said the delegation would go “as soon as possible.”


Mr. Westerwelle, the German foreign minister, underlined Monday that Greece needed to stick to the pledges it made in order to secure rescue aid in the first place.


“This debt crisis requires reliability by all partners,” he said. “That means that what is agreed to in the European Union as far as help goes. But it also means that those that receive help must carry out what they promised.


“Here there can be no deductions and no rebates. It is now necessary that the promises for reforms are actually kept to.”


Raphael Minder reported from Madrid. Paul Geitner in Brussels, Liz Alderman in Athens and Jack Ewing in Frankfurt contributed reporting.