Traders dumped the single currency and pushed sterling to 82.6p per euro as Italian and Spanish banks led a rout of financials that was driven by the anticipation of a hefty round of capital raisings.
The seemingly unstoppable debt crisis led economists at the International Monetary Fund (IMF) to urge Asian banks to brace for turbulence.
In a blog, the economists called for Asia's Chiang Mai Initiative, a $120bn (£77.5bn) agreement of pooled emergency resources, to be readied.
Shares in two Italian banks, including Unicredit, were suspended after sustaining heavy losses. Spanish banks were punished after the finance minister said the sector will need €50bn to recapitalise. French and German banks were also hit.
The concerns doused optimistic US economic data to push stockmarkets into the red for the second day in a row. Italy's MIB fell 3.7pc, Spain's Ibex 2.9pc, and France's CAC 1.5pc. In London the FTSE slid 0.8pc. The yield on Italy's 10-year bonds soared back over the 7pc bail-out level.
Sterling has risen 2.9pc against nine peers in the past six months, making it the third-best performer after the Japanese yen and the US dollar, according to Bloomberg.
France successfully raised €7.96bn of long-term debt in a bond auction but was forced to pay a higher price than last month. Demand for the bonds was lacklustre compared to a similar auction in November.
The spectre of default from Hungary added to the jitters. The government was forced to cut the size of a short-term bond auction from 45bn forints (£117m) to 35bn forints and pay a cripplingly high rate of 9.96pc.
Tamas Fellegi, the minister in charge of negotiating new IMF financing, said he was "entirely clear about the seriousness of the situation."
Mario Monti, the Italian prime minister, is due to meet Nicolas Sarkozy in Paris this afternoon to start the run-up to the next European leaders summit on January 30th.
Meanwhile the European Financial Stability Facility (EFSF) placed a €3bn three-year bond, the proceeds of which will be disbursed to Ireland and Portugal.
The Telegraph
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