The single European currency slipped to $1.3604 in Tokyo morning trade, down from 1.3681 in late London trading. The unit also fell to 112.98 yen from 113.75 yen. The dollar eased to 83.06 yen from 83.14 yen.

The New York market was closed Monday for a national holiday.

"Investors shunned risks due to the Middle East tensions and weak Asian stock markets," said Teppei Ino, analyst at the Bank of Tokyo-Mitsubishi UFJ.

"The market's focus is totally on the situation in the Middle East and Libya, whose development is uncertain for now," Ino said.

In Libya, protesters overran several cities and the uprising has now spread to the capital, with gunfire rattling Tripoli.

Human rights group are putting the death toll at between 200 and 400 since protests erupted last Tuesday in the the oil-rich north African nation ruled by Moamer Kadhafi for 41 years.

Japan's benchmark Nikkei index of the Tokyo Stock Exchange fell sharply after European markets dropped on continued concerns over the political tensions in the Middle East.

The dollar briefly soared as high as 83.56 in thin early trading. The move coincides with media reports that Libyan warplanes had bombed targets inside the country, dealers said.

Ratings agency Moody's said early in the morning it had changed its outlook on the government of Japan's "Aa2" rating to 'negative' from 'stable' on concerns current policy may not be adequate to contain huge debt.

"The dollar temporarily rose against the yen following Moody's announcement but the impact was not long-lasting," Ino said.

Masafumi Yamamoto, chief FX strategist at Barclays Bank in Tokyo, told Dow Jones Newswires: "Yen-selling should be short-lived as the ratio of overseas Japanese government bond holders (to total holders) is low."

The New Zealand dollar and the Australian dollar came under pressure after a 6.3 magnitude earthquake struck Christchurch in New Zealand Tuesday, dealers said, with "multiple fatalities" reported by police.

The New Zealand dollar was trading at US$0.7555, from US$0.7636 before the quake struck. The Australian dollar was at US$1.0065 from US$1.0086.