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UPDATE 2-Violent Catalan referendum jolts Spain's financial market

* Spanish government borrowing costs surge

* Stock market opens down more than 1 pct

* Euro drifts lower against U.S. dollar (Updates prices, adds quote)

LONDON, Oct 2 (Reuters) - Spain's government borrowing costs surged and its stock market slumped on Monday as investors weighed political fallout from a violent police crackdown on an independence vote in Catalonia.

The euro also drifted lower against the dollar after local officials said 90 percent of voters favoured secession in Sunday's referendum, which Madrid declared illegal.

That opens the door to a unilateral declaration of independence in a region that accounts for a fifth of Spain's economy.

Analysts said the uncertainty could impact the country's economic growth while reports of injuries to more 800 people could taint the reputation of Prime Minister Mariano Rajoy, who heads a minority government.

"This issue is likely to complicate policy-making at a national level as opposition parties seek to gain political capital from what is arguably a gross PR error on the part of PM Rajoy's government," said Richard McGuire, head of rates strategy at Rabobank in London.

However, mainstream parties largely back Rajoy's opposition to Catalan independence, even though the premier faces criticism over his handling of the issue.

Spanish government bond yields rose as much as 7 basis points to 1.69 percent, stretching the gap with benchmark German equivalents to close to its widest in nearly four months.

Spain's benchmark IBEX equity index was down around 1 percent, led by falls among Spanish banks. Banco de Sabadell and Caixabank, both based in Catalonia, dropped 4.3 percent and 3 percent respectively.

Ratings firm S&P Global said on Friday after affirming Spain's BBB+ rank that tensions between central government and regional authorities in Catalonia could start to weigh on business confidence and investment and weaken the country's growth prospects.

The impact outside Spain was modest, with the euro losing 0.6 percent against a broadly-stronger dollar.

The sharp rise in Spanish bond yields also pulled Italian peers to their highest in 2-1/2 months, up as much as 5 bps at 2.22 percent.

Coming just a week after German elections which saw the far-right AfD become the third largest party in the bloc's most influential country, some analysts and investors appeared to be reassessing divisions within the euro zone.

"The weekend's events in Spain underline how neither Europe's national governments nor its supranational institutions have yet to offer a workable formula to counteract the political forces working to drive the EU apart," said James Barnes of Gavekal Research in Hong Kong.

"That failure threatens to add considerably to the risk premium on European assets when the next cyclical downswing inevitably sets in." (Reporting by John Geddie, Kit Rees and Helen Reid; Editing by Robin Pomeroy and John Stonestreet)