The euro fell below $1.31 for the first time since January this evening amid more concerns about the euro zone debt crisis.
At one point it fell to $1.3057, its lowest level since January 12, before stabilising at around $1.3075.
Analysts attributed the latest slide to reports that German Chancellor Merkel had told a meeting of her party’s deputies that she was against calls to raise the upper limit of the European Stability Mechanism rescue fund, which currently stands at €500 billion.
Some countries want to increase the level of the euro zone's permanent bail-out fund that is now due to come into operation in mid-2012 as €500 billion would be insufficient to handle a potential rescue of Italy and Spain.
Merkel's comments have renewed concerns that European leaders failed to fully agree on how to resolve the debt crisis despite agreeing in principle to adopt much stronger budgetary co-ordination.
UK compromise not possible - Barroso
European Commission chief Jose Manuel Barroso has said a demand by Britain for its financial services industry to be exempted from EU regulation threatened to break up the single market.
Barroso was speaking during a debate in the European Parliament on an EU summit which agreed a new deal for fiscal and economic integration agreed by 26 of the 27 EU states - but which British Prime Minister David Cameron refused to accept.
Citing proposals jointly tabled with EU president Herman Van Rompuy and senior euro zone official Jean-Claude Juncker, Barroso said the aim of the summit was to find a way for all 27 EU states to change the bloc's treaty to fight the debt crisis together.
"The UK in exchange for giving its agreement asked for a specific protocol on financial services which as presented posed a risk to the integrity of the single market," he said.
Barroso did not go into the detail of which exemptions Cameron specifically sought, although a future tax on financial transactions was one development Britain is known to strongly resist.
Barroso said he tried to broker a compromise with an amendment to the leaders' statement that would guarantee that "any measures adopted by the council (of EU leaders) and applied to the euro area only must not undermine the single market including financial services". But he said this compromise proved impossible.
Cameron defended his decision in parliament in London yesterday to invoke a veto against a full 27-nation treaty, but French President Nicolas Sarkozy said the reality now was that Europe had become a two-speed union.
European Council President Herman Van Rompuy also told the European Parliament that an inter-governmental treaty among up to 26 EU countries on stricter fiscal rules will be finalised by March 2012.
A review of the adequacy of the €500 billion ceiling on the euro zone's combined bail-out funds will also be completed by March, Van Rompuy said.
The so-called fiscal compact is designed to allow closer surveillance of countries' spending, in an effort to prevent a repeat of the euro zone's debt crisis.
Spain pays lower rates in latest bond auction
Spain has paid sharply lower rates to borrow €4.941 billion in a sale of its government bonds, in a sign of improved confidence its creditworthiness after months of financial turmoil.
The country's treasury secured rates of 4.05% for 12-month bonds and 4.226% for 18-month bonds, down from more than 5% in the last comparable auction. It also sold more bonds than expected.
But Greece raised €1.625 billion for six months at an increased interest rate of 4.95%, the Greek debt management agency said. At the last such auction on November 8, Greece had paid a rate of 4.89%.
