The dollar rose to near a nine-month high against a basket of currencies Tuesday with the market gripped by fear that the debt crisis in Europe could unleash substantial damage on the global economy.

The euro hit a nine-month low in early Tuesday trade before posting a slim recovery, while the Australian dollar slipped to a one-year trough as market players continued to pull funds out of shares, copper and other risky growth-linked assets.

The market has started the new quarter with more concerns over the global financial system and the ability of authorities to contain the increasing sense of doom over the European financial system, said Greg Gibbs, a strategist at RBS in Sydney.

Euro zone finance ministers are reviewing the size of the private sector's involvement in an international bailout package for Greece in a move that could undermine the aid program and intensify the threat of a Greek default.

Despite ever deeper cost-cutting measures, Greece admitted Monday that it will miss its fiscal deficit target this year, sparking fresh doubts over a planned second international bailout.

Ministers also agreed after a meeting on Monday that Greece could wait until mid-November until it receives the next installment from its existing emergency aid program, cancelling their next meeting on Oct 13, when they were originally planning to sign off on the 8 billion euro payment to Greece.

The bailout plan appears to be pushed to the limit. It seems even as if policymakers needed some time to discuss an orderly default, said Makoto Noji, senior strategist at SMBC Nikko Securities.

The euro fell to as low as $1.3163 early on Tuesday before stepping back to around $1.3207, up slightly on short-covering from $1.3170 in late U.S. trade.

One possible target for the currency is around $1.3040, a 61.8 percent retracement of its long-term rally from around $1.1876 in June 2010 to $1.4940 in May 2011.

The euro also hit a 10-year low of 100.77 yen and stayed just above a six-month trough of 85.31 pence hit last month.

But as speculators' net euro short positions reached their highest in more than a year last week, as shown in data from the U.S. financial watchdog, the euro could be spared from massive falls in the near term, some analysts said.

Instead speculators may be inclined to sell commodity currencies such as the Australian dollar, positioning on which is closer to neutral.

The Aussie fell to a one-year low of $0.9454, down nearly 15 percent from a 29-year high in July, as an increasing number of market players start to worry about the soundness of Chinese growth, which many investors have counted on as the main growth driver globally as developed economies flop.

Highlighting such concerns is a sharp fall in the price of copper, of which China is by far the biggest consumer, to a one-year low on Monday.

The currency extended losses after the Reserve Bank of Australia opened the door to possible easing as early as next month if upcoming inflation data proves to be benign, saying an improved inflation outlook would increase the scope for monetary policy to provide some support to demand.

It last stood at $0.9512, with critical support seen at $0.9390-9405. The Canadian dollar also slipped to a one-year low of C$1.0560.

SPOOKY

Also spooking market players are worries that losses from falling euro zone debt prices could hurt not only European banks but their U.S. counterparts as well.

In fact, the cost of insurance against default by U.S. banks has soared in the past two months, with CDS spreads on some institutions now exceeding those on many European banks.

On top of the euro zone's debt woes, there were also worries that the United States may be slipping back into a recession, without having recovered strongly from the 2008 crisis.

Hideki Amikura, forex manager at Nomura Trust Bank said investors' U.S. inflation expectations judged from break-even yields on U.S. inflation-protected bonds are about to fall to levels normally associated with recession, with the 30-year break-even yield declining below 2 percent.

The whole U.S. quantitative easing and jobless recovery festa has finished - period. We could be in for a shakeout even larger than the Lehman shock, he said, noting that the U.S. is running out of policy options as it needs to cut its deficit and as monetary easing meets opposition from some politicians.

Worries about banks overwhelmed so much that the market chose to ignore upbeat readings on U.S. manufacturing and auto sales data on Monday.

As market players try to hoard the dollar, the world's most liquid currency, it stayed near its nine-month peak hit on Monday. It stood at 79.489, near Monday's high of 79.696.

The greenback was little changed against the yen -- as usual in recent months -- at 76.66 yen.

The yen was bought sharply during the 2008-09 crisis as many market players unwound yen-carry trades, but some analysts said such trades have not accumulated so much recently, meaning the yen has limited reasons to gain.

(Additional reporting by Ian Chua and Reuters FX analyst Krishna Kumar in Sydney, Antoni Slodkowski in Tokyo; Editing by Joseph Radford)