Fears of a resurgence in the euro zone debt crisis boosted demand for safe-haven German bonds on Wednesday, while the Bank of England and a European Central Bank official signaled more monetary policy easing to support growth was unlikely.
U.S. stocks index futures also pointed to a lower open, after a strong session on Tuesday, when a robust start to the quarterly earnings season helped the S&P 500 to its biggest gain in a month.
Growing bad loan problems at Spanish banks and comments by French president Nicolas Sarkozy, fighting for re-election, that the euro's exchange rate should be up for discussion with the ECB also helped send the single currency lower.
Investor demand for core paper remains firm, with the background threat of crisis tensions ratcheting yet higher, underpinning an overriding desire for capital preservation, said Rabobank strategist Richard McGuire.
The concern about a flare-up in the euro zone debt crisis, which has largely been centered on Spain's budget problems, enabled Germany to auction off 4.2 billion euros ($5.5 billion) in two-year bonds at a record low yield of just 0.14 percent.
The strong demand came as some high-profile investors were raising doubts over whether Europe's biggest economy could escape the impact of debt problems in Spain and Italy.
The head of German life insurer Allianz Leben, Maximilian Zimmerer, told financial daily Handelsblatt that the safety of long-term German government bonds was overrated.
They are overvalued; the yield is too low. If a euro zone country runs into trouble, Germany in any case will have to pick up the bill in the end, Zimmerer said.
In the currency markets, a shift in the tone of minutes from the Bank of England's last policy meeting in early April surprised investors.
The UK central bank signaled it was much more concerned that inflation, currently 3.5 percent, was likely to fall more slowly than it had previously forecast, due to higher oil prices, the risk of firms boosting profit margins and weak productivity growth.
The minutes also showed that a long-standing advocate of more quantitative easing on its policy making committee, Adam Posen, had dropped his call for more stimulus.
The news wrong-footed many investors and drove sterling to a 19-month high of 81.78 per euro, and a two-week high against the dollar of $1.5994.
We think that sterling can strengthen further because stopping QE effectively stops devaluing the pound, said John Wraith, head of rates strategy for Bank of America Merrill Lynch.
European Central Bank policymaker Jens Weidmann also told Reuters in an interview there was no reason to discuss another round of liquidity injection into the euro zone banking system.
Two rounds of so-called long term refinancing operations (LTROs) in December and February had pumped more than 1 trillion euros into the system, easing fears of a debt crisis and sparking a rally in riskier assets such as equities and the sovereign debt of Spain and Italy.
The euro was also under pressure from worries about Spain's fiscal and banking sector problems ahead of a planned debt sale on Thursday, when the government will sell fresh two- and 10-year bonds.
The Bank of Spain reported bad loans at domestic banks had risen to a 19-year high in February of 8.2 percent of their credit portfolios as the sector continues to battle sliding house prices and a looming recession.
The euro dropped 0.4 percent against the dollar to $1.3070, within sight of a two-month low of $1.2994 hit briefly last week.
European share prices edged lower, led by falls in Spanish stocks, but the strong start to first quarter earnings reports from the United States helped underpin the market. Around 75 percent of companies reporting so far have beaten analysts' estimates, according to Thomson Reuters data.
If this can be maintained, it will be a good reminder and a timely reminder that while governments and individuals may be struggling, companies remain in good health, said Richard Hunter, head of UK equities at Hargreaves Lansdown.
The euro zone blue-chip Euro STOXX 50 index, which saw its biggest daily gain of the year on Tuesday, fell 0.2 percent to 2,422.92. The FTSE Eurofirst index of top European shares was down 0.6 percent at 1046.35.
In commodity markets the IMF's latest economic growth forecasts, which raised the global growth estimate to 3.5 percent from 3.3 percent in January, offered some support to offset the worries about the euro zone, but prices were generally weaker.
Brent June crude slipped 98 cents to $117.80 a barrel, while U.S. May crude fell 2 cents to $104.18.
Spot gold eased for a fourth straight day to be down 0.35 percent to $1,643.71 ounce after touching a one-week low near $1,634 on Tuesday.
(Additional reporting by Nia Williams; Editing by Will Waterman)