The analysis of contagion in financial networks has primarily focused on transmission channels  operating through direct linkages. This paper develops a model of financial contagion in the  interbank market featuring both direct and indirect transmission mechanisms. The model is  used to analyse how shocks originating from outside sectors impact the functioning of the  interbank market and investigates the emergence of instability in this setting. We conduct  simulations on actual interbank bilateral exposures, constructed manually from a supervisory  dataset reported by the largest euro area banks. We find that while the impact of direct  contagion increases gradually with the shock intensity, the effect of indirect contagion is subject to threshold effects and can increase abruptly when the threshold is exceeded. In  addition, the risk posed by indirect contagion has a higher upper bound compared to direct  contagion. Finally, we find that in terms of overall impact, the shocks to the value of sovereign  debt and non-bank financial institutions represent the most significant risk to the functioning  of the interbank market.