The euro dropped sharply overnight after Spain sparked fresh concern over its banking sector and Italian prime minister Mario Monti rattled nerves with an unannounced visit to Brussels.

The euro sank to $US1.2777, its lowest level since September 2010, shortly after it was revealed that the Italian leader was heading to the European Union capital a day before a crisis meeting with French president Nicolas Sarkozy.

The shared currency also dived to an 11-year low against the safe-haven Japanese currency to strike 98.48 yen and European stocks sank, especially in Spain and Italy.

France reached its target at a debt auction with only modest increases in its borrowing price but saw lower demand.

The French treasury raised 7.96 billion euros ($9.9 billion) in long-term bonds.

The yield on benchmark 10-year bonds rose slightly to 3.29 per cent against a rate of 3.18 per cent during the last sale on December 1.

Ratings agencies have warned that France is exposed to the sovereign debt crisis gripping the eurozone and have threatened to downgrade its AAA rating.

The French auction came after the European Central Bank agreed last month to lend a record 489.2 billion euros at 1 per cent to 532 eurozone banks in a three-year refinancing operation.

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Many hoped the move would prop up the bond market and keep government borrowing rates low.

In Spain, new economy minister Luis de Guindos warned that banks may face up to 50 billion euros ($62.4 billion) in bad loan provisions and vowed to crack down on regional deficits in a new austerity drive.

"Investors are increasingly jittery that the fragile banking sector in Spain could prompt the need for external support," said analyst Nick Stamenkovic at RIA Capital Markets, adding that the euro "looks set to test $1.25 soon".

Spain's new government also warned that the accounts of the country's social security fund were worse than had been feared, with a 2011 deficit of 668 million euros ($833 million).

Investor concern spread into the secondary bond market with Italian yields once again moving above the key 7 per cent mark, a borrowing rate economists believe is unsustainable.

Spanish yields jumped to 5.53 per cent from 5.395 per cent.

"The uncertainty over the sovereign debt situation remains, alongside fears that key nations such as France could soon lose their AAA credit rating is a constant drag on the euro's prospects," said City Index analyst Joshua Raymond.

Meanwhile, the eurozone bailout fund, the European Financial Stability Facility, easily raised 3 billion euros in three-year debt intended for Portugal and Ireland, the only eurozone countries along with Greece to have received EU rescue packages during the crisis.

AFP/ABC