Japan promised on Tuesday to buy euro zone bonds this month in a show of support for Europe's struggle with a seething debt crisis.
Portugal, the latest euro zone member in the market's firing line, continued to fend off pressure to seek an EU-IMF bailout. Prime Minister Jose Socrates said his country had beaten its goal for reducing the 2010 budget deficit and did not need outside help.
Lisbon faces a crucial test on Wednesday of its ability to fund itself on the market at affordable rates after Greece, which sought a financial rescue last May, cleared its first funding hurdle of 2011, selling six-month money on Tuesday at just under the rate of its bailout loans.
The Portuguese government and Portugal will not ask for any aid or financial assistance for the simple reason that it is not necessary, Socrates told a hastily convened news conference.
But a Portuguese central bank board member, Teodora Cardoso, earlier broke ranks with political leaders, saying Lisbon would do better to seek international financing.
It would be easier if we had foreign help because this would mean that the adjustment would not be so abrupt, but if we do it alone, for the markets to believe in it, it has to be brutal, Cardoso said according to news agency Lusa.
The Bank of Portugal forecast the economy would shrink by 1.3 percent this year, contradicting government forecasts, and said Portuguese banks would continue to rely on European Central Bank for liquidity this year and next due to problems accessing the interbank market.
Yields on Portuguese 10-year bonds edged down slightly but remained above 7 percent, a level widely seen as unsustainable, after traders said the European Central Bank stepped in to buy government bonds for a second straight day.
Wednesday's bond sale in Lisbon will feature both five and 10-year paper.
Japanese Finance Minister Yoshihiko Noda said Tokyo was considering using its euro reserves to buy about 20 percent of the AAA-rated bonds to be jointly issued by the euro zone to raise funds to support the region's second bailout recipient Ireland.
I think it's appropriate for Japan to purchase a certain amount of bonds to boost confidence in the EFSF (European Financial Stability Facility) and make a contribution as a major country, Noda said.
Japan's offer comes days after China renewed its commitment to buy Spanish debt and analysts said it reflected both Tokyo's concern about the impact of the crisis on its export-reliant economy and an effort to reassert itself on the global stage.
A senior adviser to China's central bank said in a Reuters interview that Beijing too should be buying safe, jointly guaranteed euro zone debt rather than riskier bonds issued by troubled member states such as Spain and Portugal.
In principle we support the euro, but we also need to ensure that our investment is safe and generates returns, said Yu Yongding, an influential economist in the Chinese Academy of Social Sciences, a government think-tank.
I think it's much safer if we buy the fund as it has a triple-A rating, he added.
Unofficial estimates described by a senior EU official as credible suggest China holds more than seven percent of the 8.8 trillion euros in outstanding euro zone public debt, mostly through its State Administration of Foreign Exchange (SAFE) and sovereign wealth funds.
The European Union set up the 440 billion euro EFSF as a safety net for heavily indebted euro zone nations, but it failed to deter investors from betting on more bailouts.
In contrast with a chorus of European officials who have insisted that further rescues are by no means inevitable, Finnish Finance Minister Jyrki Katainen said on Tuesday that Ireland may not be the last country to seek financial aid.
Speaking to a local broadcaster, he also said Lisbon needed to act decisively to calm markets, though he declined to say whether there were any talks about loans to Portugal.
In Belgium, which has also come into the market focus because of its high debts and inability to form a government since last June, caretaker Prime Minister Yves Leterme was preparing further budget cuts designed to calm investors at the request of King Albert.
Japan's bond-buying announcement briefly lifted the euro as far as $1.2992 from around $1.2925 and the single currency traded later at around $1.2950 in Europe, up from Monday's four-month low against the dollar.
The market sees it as a reallocation of existing euros, rather than fresh net buying, said Chris Turner, currency strategist at ING.
Analysts said that besides concern that an escalating debt rout in Europe could thwart Japan's own recovery, Tokyo might also be acting to preserve its standing in global economic diplomacy after Beijing seized the initiative.
($1=82.95 Yen, $1=.7722 Euro)
(Additional reporting by Kevin Yao in Beijing, Terhi Kinnunen in Helsinki, William James in London, Rie Ishiguro in Tokyo and Masayuki Kitano in Singapore; writing by Tetsushi Kajimoto and Paul Taylor; editing by Mike Peacock, John Stonestreet)