AUSTRALIAN banks have been forced to shift to a cautious footing on funding with money markets in Europe effectively closing, says the ANZ chief executive, Mike Smith.

Global markets were jolted yesterday by fresh fractures emerging in Europe. The Australian market fell to its lowest for the year.

The falls were prompted by growing expectations that Greece will leave the eurozone and fresh concerns about the health of the Spanish banking system.

Australia's benchmark S&P/ASX200 fell 110.9 points, or 2.67 per cent to 4046.5, marking a biggest single day loss since November.

The Australian dollar also fell to its lowest level in almost six months, trading last night at US98.24¢.

Meanwhile, Australian government borrowing costs continued to hit fresh lows as investors looked for safe havens.

Fitch Ratings cut Greece's rating a notch to CCC amid fears anti-austerity parties will triumph in new elections set for next month and drive the troubled country from the eurozone.

Moody's downgraded 16 Spanish banks, citing the effects of the country's recession and reduced creditworthiness of the country's government.

''Fears over Greece and the consequences of capital flight from peripheral European banks sent a shudder through markets everywhere. Equities are a sea of red. Asian bourses are especially weak,'' said Adam Donaldson, head of debt research at Commonwealth Bank.

Even as the European crisis unfolds, Mr Smith said the world was not yet looking at a Lehman-style credit crunch with money markets in Asia and the US still open.

''The situation is more manageable than 2008 when we had the shock collapse of Lehman's and Australian banks are well placed right now,'' Mr Smith said yesterday.

''We have really had two years to anticipate and to plan for the scenario that's now unfolding in Greece and southern Europe.''

The real problem in Europe was not so much the economic contagion but the ''political contagion'' spreading through the region, Mr Smith said.

This week Commonwealth Bank's chief executive, Ian Narev, said his bank has been preparing for some time for a possible exit of Greece from the eurozone.

While this would soften the financial shock for the bank, the implications of such a move would be "material", Mr Narev told an analyst briefing.

Former Future Fund chairman David Murray has said Europe's raging financial storm represented a growing threat to Australia's banks that are still dependent on offshore credit markets to fund their business.

Mr Murray said Australia's finance system could not escape the ''longer term liquidity consequences'' of the squeeze on global credit markets.

''The contagion through the banking sector and government and the banks is the immediate issue,'' Mr Murray told BusinessDay.