Euro, Stocks Hit as Italy Debt Problems Mount

Mounting concerns over Italy's debt problems pushed the euro and stock markets down Friday only for a technical bounce to take them off their lows after sustained recent losses.

Dealers said investors appeared to have lost confidence that European leaders can deliver a solution to the Eurozone debt crisis snapping at their heels, with the euro slumping to seven-week dollar lows.

News that Rome had to pay record and dangerously high rates to raise fresh funds from markets was unnerving when coupled with a French and German warning that if Italy were to collapse, it would take the euro with it.

Meeting Thursday, it was clear French President Nicolas Sarkozy and German Chancellor Angela Merkel remained as far apart as ever on the European Central Bank's role, glossing over their differences.

Merkel insists the ECB should focus on its main task -- combating inflation -- while Sarkozy wants it to become a lender of last resort, acting as a backstop in the bond markets to help out struggling eurozone member states.

Dealers said that after falling early in the day, the markets turned firmer mid-afternoon amid speculation there could be changes to the eurozone's planned permanent rescue mechanism, reducing the pressure on the banks.

The 2013 European Stability Mechanism was supposed to be primarily funded by governments but private sector banks -- already dragged into taking losses on their Greek government bond holdings -- also had a role to play.

If that was now to be dropped, the banks would benefit and their shares were rising on the lead.

In mid-afternoon London trade, London's FTSE 100 of top shares was up 0.95 percent, Frankfurt's DAX 30 gained 1.51 percent and in Paris the CAC 40 added 1.23 percent, all returning to positive territory.

The Milan stock market plunged 1.91 percent after Italy paid record rates in a 10-billion euro ($13.2-billion) bond sale and as the EU kept up pressure over the country's debt on Friday. But even it turned round, posting a gain of 0.47 percent at around 1500 GMT.

The rate on bonds due in six months soared to 6.504 percent and the two-year rate hit 7.814 percent, levels considered dangerously high for the long term given Italy's massive 1.9 trillion euros public debt mountain.

The European single currency at one stage plunged to $1.3212, its lowest point since October 4, on the Italian lead but later stood at $1.3268, still down from $1.3347 in New York late Thursday.

"As confidence that a solution to this crisis might be forthcoming and that the euro will survive has evaporated, (it is) no surprise that international investors have chosen to ditch the euro in favour of more safe-haven currencies," said Howard Wheeldon, strategist at brokers BGC Capital.

"The reality is that as those charged with leading the Eurozone out of this crisis appear to have moved further apart, it seems to me that short of a miracle the euro will just keep heading south."

In New York, shares were firmer in opening trade, with the blue-chip Dow Jones Industrial Average up 0.45 percent and the tech-rich Nasdaq rising 0.37 percent.

Markets remained nervous at the end of a week that saw investors shun a bond sale in Germany, the eurozone's paymaster and strongest economy, stoking fears the whole euro project is unraveling.

IG Index analysts said the "debt crisis has reached a fork in the road," believing only decisive action by the ECB or common Eurobonds for pooled debt can save the day.

As it will take years to put in place the tighter Eurozone regulations to make it work properly, "there is plenty of market speculation that Merkel will be forced to concede" on either Eurobonds or the ECB.

"Given the intensity of pressure in the Eurozone bond market such a bargain could come fairly soon," they said, looking ahead to the December 9 EU summit.

In Asian trade earlier Friday, Tokyo was flat, Sydney shed 1.48 percent, Hong Kong was down 1.37 percent and Shanghai fell 0.72 percent.