NEW YORK/LONDON: Worries that a political crisis in Portugal could force the debt-laden country to seek a bailout sent the euro lower on Wednesday and triggered safe-haven demand for government bonds.
The renewed fears of a euro zone debt crisis drove down European banking shares and weighed on stocks in New York.
Uncertainty over the longer-term impact of Japan's earthquake, tsunami and nuclear crisis also drove a bid for safety, boosting the price of gold.
The cost of insuring Portugal's five-year debt against default hit two-month highs, reflecting the growing belief that Lisbon will follow Greece and Ireland in seeking emergency funding if parliament rejects a new series of austerity measures.
Portuguese Prime Minister Jose Socrates has threatened to resign if the package is rejected in a vote on Wednesday, meaning his minority Socialist government could collapse a day before a key European summit.
"There's currently a lot of concern on the Portuguese budget vote and the potential political implication for it. The fear is that if Portugal failed to agree on austerity measures, we can potentially see the country forced into the EFSF (rescue fund)," said Mary Nicola, currency strategist at BNP Paribas in New York.
Hopes that this week's European summit would yield a decision on how to increase the effective capacity of the euro zone bailout fund were dashed after the release of a draft document prepared for the meeting. The decision will likely come in June.
Portugal's political crisis has knocked the euro from its recent 4-1/2-month highs against the U.S. dollar, although the slide is expected to be temporary, given the expectation for the European Central Bank to raise interest rates next month.
The euro was last down 0.6 percent at $1.4110, having hit a low for the session of $1.4106, according to trading platform EBS.
The renewed concerns over European debt halted a week-long tentative rebound in European stocks, while on Wall Street bank shares fell on concerns over vote by Portugal's parliament.
"The opposition wants to vote no, and if the budget deal fails, the Socrates government will fall, and hat in hand the country will go to the EU/IMF," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
The FTSEurofirst 300 dipped 0.2 percent and the MSCI All-Country World index fell 0.3 percent, down for the first session in five.
The Dow Jones industrial average dropped 18.89 points, or 0.16 percent, to 11,999.74. The Standard & Poor's 500 Index fell 6.53 points, or 0.50 percent, to 1,287.24. The Nasdaq Composite Index lost 15.98 points, or 0.60 percent, to 2,667.89.
YEN LITTLE CHANGED
The yen held steady, hugging a tight range close to 81 per dollar, yet traders were wary that the Bank of Japan might step in again if the dollar fell below 80.50, following Friday's rare market intervention by major central banks to curb Japan's currency.
Underlining the continuing risks in Japan, authorities advised against allowing infants to drink tap water in Tokyo due to raised radiation levels, and the United States became the first nation to block some food imports from Japan.
Sterling fell 0.8 percent to $1.6277, hitting the day's low as UK Chancellor George Osborne released a lower growth projection for the coming year and increased borrowing targets from 2011/12 to 2014/15.
U.S. Treasuries prices were higher on worries over the cost of Japan's rebuilding and after warning on tap water. Benchmark 10-year notes were last up 11/32 in price to yield 3.28 percent.
U.S. oil prices edged higher while Brent dipped, with prices expected to remain underpinned by violence in Libya and unrest in Yemen, which neighbors top producer Saudi Arabia.
Spot gold was up 0.2 percent at $1,432.18 an ounce.
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