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LONDON (AFP) – The European single currency and stock markets fell sharply on Wednesday after Moody's rating agency placed Spain on review for a possible downgrade, refocusing attention on the eurozone debt crisis.

The euro plunged as low as 1.3286 dollars in early morning deals, compared with 1.3375 dollars late in New York on Tuesday.

And the shared eurozone unit tumbled to a record low point against Switzerland's safe-haven currency, hitting 1.2759 Swiss francs.

"News that Moody's has put Spain's debt rating on review has knocked the euro," said Rabobank analyst Jane Foley.

"The news plays on fears that contagion could extend to the Spanish bond market, though it does not enlighten the market much further with respect to the underlying issues with respect to Spain."

The Madrid stock market dived 2.01 percent, Frankfurt dropped 0.72 percent, London shed 0.37 percent and Paris fell 0.84 percent.

Moody's announced it could cut Spain's credit rating again because of heavy debt refinancing needs for the year ahead, banking problems and high-spending regions.

"Moody's believes that the ... downside risks warrant putting Spain's rating under review for downgrade," top Spain analyst Kathrin Muehlbronner said in a statement.

"However, Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed eurozone countries ... Moody's review will therefore most likely conclude that Spain's rating will remain in the Aa range."

The agency cut Spain's sovereign debt rating from Aaa to Aa1 in September, adding to the pressures on Madrid and the wider eurozone.

In response, the Spanish government said it aimed to convince Moody's over the next three months to abandon the threatened downgrade.

Wednesday's grim news comes one day after Standard & Poor's lowered its outlook for Belgium from stable to negative.

"The euro tested back below 1.33 dollars after Moody's said it may downgrade Spain's credit rating, reminding the markets that S&P had done the same with Belgium 24 hours before," said analyst Ilya Spivak at trading website Daily FX.

The developments have rattled investors ahead of a European summit on Thursday and Friday in Brussels, where EU leaders will seek to hammer out proposals for a permanent rescue mechanism for debt-ridden nations.

Later on Wednesday, Ireland's parliament will vote on a 85-billion-euro (113-billion-dollar) EU-IMF bailout, which comes hot on the heels of the rescue of debt-plagued Greece in May.

Asian equities meanwhile reacted sluggishly on Wednesday to overnight gains in New York, with Tokyo held back by a downturn in Japanese business confidence.

Wall Street climbed higher on Tuesday after a decision by the US Federal Reserve to maintain near-zero interest rates and a 600-billion-dollar asset purchase programme.

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LONDON (AFP) – The euro and European stocks rallied strongly on Wednesday and pressure on Spain eased, but the eurozone debt crisis weighed heavily with a credit watch for Portugal and Germany struggling to sell bonds.

Leading EU figures warned that financial markets were underestimating the will of EU leaders and institutions to defend the euro and the eurozone.

But in a new sign of the extent of anxiety among investors, a German bond issue was undersubscribed.

"Markets are still concerned about the debt crisis spreading to other countries," said Commerzbank analyst Ulrich Leuchtmann.

The euro shot above 1.31 dollars in trading here, a day after hitting a two-month low point under 1.30 dollars. The Madrid stock market meanwhile surged more than 3.0 percent in early afternoon trading.

"For all of the woes around at the moment the equity markets continue to be reasonably solid," said Simon Denham, head of trading group Capital Spreads.

Overnight, ratings agency Standard & Poor's placed Portugal on a credit watch because of "increased risks to the government's creditworthiness".

S&P on Tuesday said increased risks came from the Portuguese government not doing enough to enact "growth-enhancing reforms" and from proposed changes to EU rules that could mean private bondholders are last in line to be paid back.

Fears that Portugal could follow Ireland and Greece in receive a massive international financial bailout had sent the euro sinking on Tuesday.

However the single currency recovered on Wednesday, standing at 1.3105 dollars from 1.2983 dollars late on Tuesday in New York.

"The euro has stabilised overnight following comments from ECB President (Jean-Claude) Trichet hinting that the ECB could consider expanding its sovereign debt purchase programme," said Lee Hardman, analyst at The Bank of Tokyo-Mitsubishi UFJ in London.

European Union bailout chief Klaus Regling and France's Finance Minister Christine Lagarde meanwhile each stressed on Wednesday that the EU was focused on protecting the euro.

Their strong statements came as leading European stock markets rallied, with London jumping 1.45 percent, Frankfurt up 1.76 percent and Paris gaining 1.0 percent.

Stock prices in Madrid shot up 3.11 percent and share prices also climbed in Italy and Portugal.

The 10-year borrowing rate for Spain eased to 5.30 percent having reached 5.50 percent on Tuesday, and the difference above the rate Germany must pay fell to 2.60 percentage points from 3.0 on Tuesday. The Spanish government announced a new wave of privatisations.

However in eurozone benchmark Germany, the agency which manages the country's sovereign debt received offers for just 4.55 billion euros after tendering five-year bonds worth a total of 5.0 billion euros.

Analysts meanwhile noted that the intention of the European Central Bank to edge back towards normal monetary policies when its governing council meets on Thursday may have been blown off course by the Irish debt crisis.

When the Greek crisis caused lending markets markets to freeze up in April the ECB began providing banks with unlimited short-term loans at low rates.

As lending markets in most of the eurozone countries have returned to normal, the ECB has begun to look for an "exit strategy" to end its exceptional measures to support the banking system, but the Irish crisis has reawakened concerns.

"The ECB will need to continue to provide exceptional support, despite earlier indications," ABN-Amro analysts said in a research note.

In taking on problems faced by major Irish banks, Dublin dug itself a hole that forced it last week to seek 67.5 billion euros (88 billion dollars) in financial aid from the European Union and the International Monetary Fund.

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Protesters burn an image of Prime Minister Brian Cowen the Ireland in front of Leinster House in Dublin.?Photo: Reuters

In a note describing the prospects for 2011 for European banks, analysts of Deutsche Bank said sovereign concerns "at the top of the agenda.

"We expect this process to continue at the beginning of 2011, as economics team Deutsche Bank believes that the Portugal is very likely to exploit the IMF / EU (ESFS) rescue mechanisms year prochaine.Mais we believe that the Domino should stop down Spain.".

Colleagues income fixed at Deutsche said in a note Monday that they were not at all surprised to see the concerns on the Spain rising again.

"The market seems to think that it is inevitable Portugal request assistance then - maybe in January?"-and then after Spain will be examined with a fine tooth comb in the coming months.Doing work for the future we growing arrived to the conclusion that if you think that the sovereign decision of problems of Greece, the Ireland and perhaps Portugal depends on whether you think it is a problem with the financial system across the West, or if you think that's only a problem with the individual over leveraged entities.?

Simon Samuels, Barclays Capital analyst said in a note last week:

"" The Irish crisis and subsequent salvage returned sovereign concerns to the forefront the spirit of the investisseurs.Mais is it simply the case that some harsh comments of Angela Merkel did bond investors run coverage? we do not believe. ""

He added:

"In short, the Irish sovereign has been dismembered by its banking system...."In September, Irish banks to share repurchases of € will form the Government guaranteed debt.While the Government could (and has) extend this warranty as Iceland in 2008, it seemed no more credible on the market, bond issues becoming nerve, and the system has begun to implode.?

Written on the subject which could be then, he said:

"Our esteem Spain challenges remain considerable - the probability of a positive result poor so that at least the sovereign and the banks have successfully navigated travelled to wire the funding hump faced in 2011 both printemps.Les asset quality quotation marks will probably last much more longtemps.En however, we are much more optimistic on Italian perspective .the ' lack of assets and large bubble limited funding dependence suggests that banks have little additional risk to the Italian sovereign."

He added:

"Many commentators have suggested that the Spain is too large to be admitted to concrete plans on how to solve a real Spanish crisis remain opaque .Tandis failure, should materialize the Spanish the tail of a surety risk off, it is likely that the French and German economy (more) will be the largest share of saving the Spain and, by extension, the euro zone."

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Portuguese politicians today adopted a budget austerity for 2011, designed for the deficit of 7 3pc output sink this year to 4 6pc next year. The European Union welcomes the move, saying that it would enhance confidence in the economy of the country.

Fears that the Portugal and the Spain will be the next member to be swallowed by their debt problems were climbing during the week, yields on Spanish debt for 10 years, from two points of base Friday to 5 16pc - a record high since his arrival at euro .the ' Italy is also under threat.

Simon Derrick, head of research of the currency at the Bank of New York Mellon, said: "our data show are outputs of the Spain noticeable binding Italy suggesting investors are increasingly unstable .the ' case seems to set the additional euro weakness."

The euro fell to a minimum of two fresh months against the dollar, falling 1.2 cents Friday at the end of the week in more than five hundred more low at $1.3239.

Markets continue to sell off the coast of sovereign bonds Spain concerns that there could possibly be fourth online for a rescue operation with their concern about the stability of its weakest banks withdrew in the role as lenders played Ireland light force in Dublin in a rescue plan.

Javier Ariztegui, Deputy Governor of the Bank of Spain Friday urged unquoted regional savings banks the countries hard hit by a bubble property bursting in mergers and said that additional stress test results would be ready by the end of March.

In the meantime, banks need to continue efforts to clean up their balance sheets and show greater transparency, including detailing the quarterly results.

Cover additional stress, which will be published in advance of the parallel audits due to be carried out in other regions of the European Union - tests "of the additional information on the promotion and construction, residential mortgages, detailing ready-to-value ratios corresponding and collateral", he said.

With the exception of a few small banks unlisted savings banks of the Spain past scale European this - well that analysts have questioned their relevance since the Irish bailout was announced July stress tests.

Zapatero says that the European Commission, nor the Central Bank has urged Spain to take additional measures to meet the objectives of reducing its deficit limits of euro in 2013.

"The European Commission did not request Spain for nothing in the world, the ECB has not asked Spain why whatsoever, nor yesterday or the day before", he said.

He reiterated that his Government did not plan any hiking tax percentage - point increases a tax on value added earlier this year.

"The VAT increase contributed much to our deficit reduction", he said, referring to the figures published Tuesday showing the deficit for the year to October Spain central Government had fallen by 47.3% a year.

Meanwhile, the credit rating agency Fitch has warned all Irish Bank senior debt restructuring "could have broader implications for the euro area.

TEN Irish State broadcaster said Friday that the interest rate will be much higher than expected on the Ireland bailout loan.

He reported that the rate is likely to be between 6 7pc and 7pc, which prompted anger of opposition Fine Gael Ireland, who said anything over 6pc is "unacceptable".

The terms are likely to be fixed by the beginning of next week.

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