Euro hits two-month low but shares recover

In London morning trade, the single currency dropped to $1.3285 -- the lowest point since September 22 -- before rebounding back above 1.33.

London's benchmark FTSE 100 index climbed 0.72 per cent, Frankfurt's DAX 30 rose 0.92 per cent and in Paris the CAC 40 gained 0.50 per cent a day after heavy losses.

However the Dublin market fell 0.60 per cent as investors awaited details on Ireland's latest public spending cuts due at 1400 GMT.

Portugal, also seen at risk over its public finances, was embroiled in a general strike against austerity measures.

Increasing concerns over the eurozone were highlighted on Wednesday when the rate Spain must pay to borrow for 10 years jumped to above 5.0 per cent for the first time since 2002. It also reached a record wide gap above the key eurozone German rate -- of 2.51 percentage points.

The Madrid stock market gained 0.41 per cent in morning deals, reversing losses seen earlier Wednesday.

Markets are worried that Ireland's debt troubles will spread to Portugal and Spain, and are also concerned about tensions between the two Koreas.

"German Chancellor (Angela) Merkel has described the situation in Europe as 'exceptionally serious' and we don't think this is an exaggeration at all with the financial markets indicating zero confidence in the authorities' ability to stem the contagion in the eurozone debt markets," said Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi UFJ.

Merkel said on Wednesday the European Union should set limits on markets and ensure that private investors bear some of the risk on government bonds.

"Do politicians have the courage to also make those who earn a profit take some of the risk?" Merkel said in a speech to parliament. "This is about the primacy of governments, about setting limits on markets."

Germany wants a new rescue mechanism for eurozone countries from 2013 to ensure that private investors, not just taxpayers, bear part of the costs of bailouts.

The proposal has seriously rattled markets and also some other European governments, making for tough negotiations ahead of a summit of the bloc's leaders in mid-December.

With its banking system in dire straits and its budget deficit forecast to be 10 times the EU limit this year, Ireland became on Sunday the second eurozone member in six months to apply for a bailout after Greece.

"We have said that the stability of the euro as a whole must be guaranteed and therefore we will ... consider the appeal of Ireland positively," Merkel said on Wednesday.

Analysts at the Capital Economics consultancy believe that the "eurozone fiscal crisis will become too big to resolve harmoniously".

Germany appears to be saying it will provide more bailout support when a current rescue scheme expired but on the condition that private investors take some of the pain.

"If Germany doesn't get such an agreement from other member states or else simply decides it has had enough of providing support to weaker countries, it may decide to cut its losses and leave monetary union," Capital Economics analysts wrote in a research note.

On the other hand, if Germany "does get what it wants, then other countries might not like the consequences," one of which would be permanently higher borrowing costs, and "might then to choose to leave (the eurozone) themselves", they added.

The European single currency's level on Wednesday compared with $1.3364 late in New York on Tuesday.

Earlier this week, the euro had briefly spiked above $1.37 on relief over the Irish bailout news. However, it has since shed almost three percent so far this week on mounting eurozone debt concerns.

Later on Wednesday, beleaguered Irish Prime Minister Brian Cowen will present a four-year austerity plan tied to the bailout, which will reportedly total 85 billion euros ($114 billion). Analysts are concerned that passage of a vital budget on December 7 could be compromised by pressure for an immediate general election.