The euro declined to a 16-month low against the dollar and global stocks edged lower on Wednesday after Fitch Ratings warned of serious risks if Europe did not act more aggressively to contain its debt crisis.
The stark reminder of Europe's debt troubles drove down oil prices, while investors piled into safer assets including gold and bonds.
The euro slumped to a 16-month low of $1.2661, according to Reuters data, after Fitch's head of sovereign ratings said the European Central Bank needs to ramp up its buying of euro zone debt to support Italy and prevent a cataclysmic collapse of the currency.
There is a lot of event risk, and that has investors wary of holding euros, keeping it biased lower, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
Persistent talk of an imminent cut to France's triple-A rating also weighed on the euro. However, a French Treasury source said the government had not been informed of any imminent decision on its credit ratings.
A pledge by German Chancellor Angela Merkel that her country would pay more capital into the European Stability Mechanism fund, once the bailout fund is launched later this year, prevented a stronger sell-off in the euro, traders said.
The ECB at its policy meeting on Thursday is expected to hold rates at a record-low 1 percent while pressing governments to step up their efforts to tackle the 17-nation bloc's debt crisis.
In addition, investors are on edge ahead of sovereign debt auctions by Italy and Spain over the next two days. Spain on Thursday will sell up to 5 billion euros of 2015 and 2016 paper, just hours before the ECB's decision. Italy offers up to 4.75 billion euros of five-year bonds on Friday.
Adding to signs of pessimism, senior euro zone bankers said talks about private sector participation in a Greek bailout are going badly.
Global stocks fell 0.2 percent, according to the benchmark MSCI All-Country World Index <.MIWD00000PUS>. Wall Street stocks ended the day little changed, near five-month highs.
In Europe the FTSEurofirst 300 index <.FTEU3> of top shares closed down 0.5 percent at 1,021.97 points after touching a five-month high of 1,029.32 where it tested a resistance level.
At the close, the Dow Jones industrial average <.DJI> was down 13.17 points, or 0.11 percent, at 12,449.30. The Standard & Poor's 500 Index <.SPX> was up 0.39 points, or 0.03 percent, at 1,292.47. The Nasdaq Composite Index <.IXIC> was up 8.26 points, or 0.31 percent, at 2,710.76.
While the euro zone debt crisis remains a headwind, the U.S. stock market has been steadily showing signs of separating its performance from the euro and euro zone issues.
Even when there are dips on Wall Street on euro zone-related issues, the duration of the decline or magnitude is shorter and less significant, and the market tends to recover quickly, said Randy Warren, chief investment officer of Warren Financial Service.
Energy stocks were the biggest drag on the S&P 500, following the decline in U.S. crude oil prices.
Financials and materials sectors showed the biggest sector gains.
Brent crude futures were hit by worries about the European debt crisis. Brent February crude dropped $1.04, or 0.92 percent, to settle at $112.24 a barrel.
U.S. Treasuries prices rose as investors sought protection in traditional safe havens. Prices briefly extended gains after the government auctioned 10-year notes at a record low yield.
The benchmark 10-year U.S. Treasury note was last up 16/32, with the yield at 1.9072 percent.
Gold prices rose to a one-month high, boosted by evidence of strong physical demand from China which fuelled fund buying after bullion's recent sell-off. Spot gold was up 0.3 percent at $1,637.51 an ounce.
(Reporting by Caroline Valetkevitch and Walter Brandimarte; Additional reporting by Gertrude Chavez-Dreyfuss, Julie Haviv, Angela Moon and Richard Leong; Editing by)