The euro hit a 2-1/2 month low against a broadly firmer dollar on Tuesday while world stocks slipped as concerns grew about the European banking sector and the fiscal health of Greece.
An Austrian newspaper reported the country's central bank and its financial market regulator have put Oesterreichische Volksbanken
A spokesman for Oesterreichische Volksbanken, Austria's top cooperative bank, is at no risk of nationalization and a media report it was on a regulator watchlist is inaccurate.
Nonetheless, the newspaper report, which did not cite sources, fueled concerns that European banks are in a fragile state even after Monday's surprise announcement that Abu Dhabi would provide Dubai $10 billion in bailout money eased concerns about European banks which are heavily exposed to Dubai Inc.
Concerns about the fiscal health of Greece weighed on local banks <.FTATBNK> and pushed the Greek bond yield higher relative to the safer German counterpart after Prime Minister George Papandreou's spending cut plans announced late on Monday failed to convince investors.
Persistent concerns about sovereign risk in Europe such as those in Greece and softer stock markets are lending support to the dollar, said Tomohiro Nishida, treasury department manager at Chuo Mitsui Trust and Banking company.
MSCI world equity index <.MIWD00000PUS> fell 0.3 percent while the FTSEurofirst 300 index <.FTEU3> edged down.
The dollar <.DXY> rose half a percent against a basket of major currencies to its highest in six weeks.
The euro fell as low as $1.4553, down two thirds of a percent. The 10-year Greek/German government bond yield spread widened to 257 basis points from 231 on Monday as investors demanded higher premium to hold Greek debt.
The rising inner European Monetary Union yield differential is not only a sign of rising credit risk in EMU's peripheral, it also illustrates that the currency project has been built on a weak foundation, BNP Paribas said in a note to clients. The bank argued that without fiscal transfers from the EMU's core to the periphery, Greece, Spain, Portugal and Ireland would have to go through massive deflationary shocks which would affect via their exports channels as well as core Europe.
Europe will develop toward a lower growth and inflation regime, preventing the ECB from hiking rates for a long period, which will work against the euro, Paribas said.
Emerging stocks <.MSCIEF> fell 0.4 percent.
Dubai stocks <.DFMGI> rose as much as 3.4 percent at one point after Abu Dhabi's help averted a default on $4.1 billion bond issued by property firm Nakheel, which said on Tuesday it had sent the funds for the bond to the principal paying agent.
U.S. crude oil fell a quarter percent to $69.34.
Bund futures were steady on the day.
(Editing by Mike Peacock)