The euro dropped to as low as 1.2969 dollars during the day, its lowest point since September 15. In late trading it rose to 1.3030 dollars, still down from 1.3121 dollars late in New York on Monday.

The dollar fell to 83.54 yen from 84.25 yen on Monday.

Gold, seen as a safe haven investment in troubled times, jumped to 1,383.50 dollars an ounce from 1,357 dollars on Monday.

"All this risk aversion and European crisis has benefited the US dollar," said Simon Denham, head of trading firm Capital Spreads.

Lee Hardman, an analyst at The Bank of Tokyo-Mitsubishi UFJ, said "there appears plenty of scope for further euro downside from current levels as the eurozone debt crisis intensifies."

Emphasising the markets' worry about contagion from the Irish debt bailout, Spanish and Italian government 10-year borrowing rates rose on Tuesday to a record wide gap above the rate eurozone benchmark Germany must pay.

Markets have given "a big thumbs down to the steps announced by the European authorities at the weekend" when Ireland's bailout was announced, said Hardman.

"The poor bond market reaction is an indication that the market is worryingly losing confidence in the European authorities' ability to deal effectively with the eurozone sovereign debt crisis.

"It is much harder to regain confidence than lose it," he added.

The gap between the Spanish and German borrowing rates widened to 3.0 percentage points on Tuesday, and the Italian gap to 2.09 percentage points.

The European Union and International Monetary Fund on Sunday agreed to an 85-billion-euro (113-billion-dollar) deal for Ireland but the announcement was quickly overshadowed by worries over which country could be next in line.

Ireland's rescue, which follows a massive bailout of Greece, have added to the pressures on other weaker eurozone members Portugal and Spain, with dealers talking of a contagion effect that could wreck the euro if it spreads unchecked.

Financial analysts warn that Spain is at high risk of eventually needing help to finance its debt and overloading EU safety nets, although the Spanish government insists it does not need a bailout.

At Pimco, a big fund heavily invested in government bonds, chief executive Mohamed El-Erian, said: "My concern is that indecisive management of problems in Greece and Ireland might lead investors to sell sovereign bonds issued by peripheral (eurozone) states as a preventive measure."

Spain's Deputy Finance Minister Jose Manuel Campa insisted that the bond spead is a just short-term fluctuation.

"We cannot react to fluctuations of one or two days on the market, especially at times when, given the market tensions, there is a perception that liquidity is smaller than in normal market conditions," he told reporters.

"These are short-term fluctuations. We are currently in a period of turbulence. What is important is to execute planned policies and the markets will respond," he added.

European stock exchanges slid for a second day in a row.

In London the FTSE 100 index down 0.41 percent at 5,528.27 points, while in Paris the CAC 40 fell 0.73 percent to 3,610.44 points and in Frankfurt the DAX dipped 0.14 percent to 6,688.49 points.

Elsewhere Milan fell 1.08 percent, Amsterdam 0.69 percent, Lisbon 1.25 percent, Madrid 0.62 percent and the Swiss Market Index 1.33 percent.

On Wall Street, the blue-chip Dow Jones Industrial Average slid 0.28 percent to 11,021.69 points at midday, while the S&P 500 index, a broader measure of the market, dipped 0.49 percent to 1,181.95.

The tech-rich Nasdaq fell 0.97 percent to 2,500.76 points, with Google shares dipping 2.8 percent following the opening bell on news that the European Commission will investigate if it abused its dominant position in the search and advertising market.

"Wall Street remains under pressure from fears of spreading contagion in the eurozone, with Spain and Portugal seen as the next potential targets in the wake of Ireland's bailout," said analyst Joseph Hargett of Schaeffer's Research Investment.

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