london 06 26, 2012, 14:40 IST
Apprehension over the outcome of this week's crucial European leaders summit left the euro near a two-week low on Tuesday, though European shares managed a slight uptick after three days of losses.
A formal request from Spain for European funds and Moody's mass downgrade of 28 of its banks, plus news that Cyprus had become the fifth euro zone nation to request a bailout, kept the appetite for riskier assets low.
"Investors want to see what direction the summit's outcome will point to. It's very unclear what specific agreements may actually be made," said Hirokazu Yuihama, a senior strategist at Daiwa Securities.
The euro was flat on the day at $1.2510 after it fell as low as $1.2471 on Monday, its lowest since June 12.
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The two-day summit in Brussels on June 28-29 will be the 20th time EU leaders have met to try to resolve a crisis that has spread across Europe since it began in Greece in early 2010.
Doubts about the outcome are fed by Germany's resistance to the idea of common euro zone bonds to underpin the zone's currency union, despite calls from across the bloc.
German Chancellor Angela Merkel said on Monday that sharing the debt liability within the 17-nation euro area would be "economically wrong and counterproductive".
"So the summit is likely to be one where several ideas are put on the table but that agreement on anything meaningful is likely to be low," Deutsche Bank credit strategist Jim Reid said in a note to clients.
"It seems like the crisis needs to take another turn for the worse to focus the minds on a more radical agenda."
DEBT MARKETS WEAKEN
Fears that the meeting will be short on substantive proposals was driving up the yields on the debt of Italy and Spain. Italy's 10-year bonds rose 1.5 basis points to 6.04 percent, with Spain's equivalent up four basis points at 6.68 percent.
Spain is expected to pay its highest short-term borrowing rates in over six months when it auctions up to 3 billion euros of three- and six-month T-bills later in the day.
Italy will also sell zero-coupon and inflation-linked bonds later in the day and before European leaders meet on Thursday and Friday for their latest attempt to address the debt crisis, now in its third year.
Yields on normally safe-haven German debt were also on the rise as some investors worry about the impact the debt crisis will have on the region's largest economy.
"Germany cannot support the euro zone by itself with its debt burden rising explosively and trend growth falling as a consequence, or without bringing its precarious banks dangerously close to the brink of collapse," said Stephanie Kretz, a member of the investment strategy team at Lombard Odier.
In equity markets the FTSEurofirst 300 index was up 0.4 percent at 9890.25 points, but this was seen as only a temporary recovery following its biggest one-day fall in more than three weeks on Monday.
"All the European markets are looking a little bit oversold, but we would still be looking to sell into any strength," Central Markets senior broker Joe Neighbour said.
Brent crude held steady near $91 per barrel, while U.S. crude fell 11 cents to $79.10, with worries over the European summit tempered by forecasts of a drop in U.S. crude inventories.