The move in German bunds caused the euro to soar 0.9 percent against the dollar to a two-week high of $1.1380, before paring back. Against sterling, the common currency hit a four-week high and rallied past a two-month high against the Swiss franc.
"From a chart perspective, 1.1315 percent is the next key level (for German Bund yields) and given yield spread that point to a further bounce, I suspect that any break of that level would act as a trigger for a further spike," said macro strategist at Societe General, Kit Juckes.
"My heart wants to go short against 1.1315, and my head wants to hide under a duvet," he said.
Remarks made by the ECB's Draghi at the bank's monthly press conference Wednesday sparked a rise in government bond yields, after the central bank chief played down the impact of bond market volatility.
Reassurances that the ECB was not even discussing an "exit strategy" for its 60 billion euro ($67 billion)-a-month program did little to comfort traders as Draghi said investors should get "used to" volatility in markets.
U.S. 10-year Treasury yields jumped over 1 percent to trade around 2.4 percent in European trade Thursday, setting a new high for the year. However, the yield eased lower as Thursday's session progressed and was trading at 2.311 percent by London afternoon trade.
French stocks took the brunt of the selling as they slipped as much as 2 percent in late morning trade, while Germany's DAX was down around 1.5 percent. They pared some losses during the afternoon.
Currency economist at Bank of Tokyo-Mitsubishi said euro "short" positions, or betting on further weakening in the bloc's currency, remain vulnerable to a further squeeze in the near-term, while volatility in the euro-zone bond market remains high.
"Higher volatility in the euro-zone bond market is feeding through and helping to maintain higher volatility in the euro, which has been evident so far at the euro's current low valuation," he said.
"The direction of the euro is becoming less predictable in the near-term amid higher volatility although we remain comfortable with our underlying view that the euro should remain weak with any rebounds likely to prove temporary," he added.