Image caption Weaker demand for benchmark French 10-year bonds weighed on bank shares

The euro has dropped to its lowest rate against the dollar and pound in 16 months, as concerns continue over the health of Europe's banks.

The euro fell as low as $1.2780 against the dollar and was at an 11-year low versus the yen.

Against the pound, it fell to 82.52p, the lowest since September 2010.

Markets were unsettled after France's cost of borrowing rose and a Spanish minister suggested its banks may face a higher bad loan bill.

Bank stocks dropped, with shares in Italy's UniCredit at a 19-year low.

Luis de Guindos, Spain's economy minister, told the Financial Times that its banks may face up to 50bn euros ($64.2bn, £41.3bn) in new bad loans - higher than previous public estimates by the government.

On Thursday, Spain also unveiled more austerity measures - after outlining 8.9bn euros in new spending cuts and tax rises last week.

Spain said its social security deficit was worse than expected in 2011 and aims to recover 8.2bn euros that has been lost to tax fraud this year.

This is the latest in a wave of austerity measures, with a total of 16.5bn euros to be cut in 2012.

French bank stocks closed lower, with Societe Generale down 5.4% and BNP Paribas down 5.3%.

Germany's Deutsche Bank fell almost 6%, with Commerzbank down 4.5%.

Spain's Santander dropped 4.5%. Italy's UniCredit fell 17% before its shares were suspended for the second day in a row.

Italy and Spain - both passing painful spending cuts - will have to sell billions of debt in the coming months.

French debt sale

France sold 8bn euros of bonds at an auction, paying an interest rate of 3.29% to borrow for 10 years, up from 3.18% at the last sale in December.

Many investors fear that France is poised to lose its top credit rating, making it more expensive to borrow.

In December, France saw its AAA credit rating placed on negative outlook by rating agency Fitch.

Fitch said the change in outlook was prompted by the heightened risk of government liabilities arising from the eurozone's debt crisis.

At Thursday's sale, demand from investors for the benchmark 10-year bonds had fallen.

The bid-to-cover ratio was 1.64, almost half of the 3.05 it was in the December auction.

France introduced a 65bn-euro austerity plan in November.

The gap, or spread, on French bonds compared to comparable debt from Germany - Europe's largest economy - hit record highs last year.