Peripheral debt worries haunted the euro zone as Finland proposed that Greece provide collateral in return for more aid, Reuters reported.

Helsinki's plan sparked requests from Austria, the Netherlands, Slovenia and Slovakia for similar treatment.

"You cannot point to one factor driving the euro today, but rather several factors and news in the last 12 hours that has overwhelmingly been euro-bearish," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.

She said weak euro zone confidence and expectations the European Central Bank will refrain from raising rates also added to bearishness.

Euro zone economic sentiment fell more than expected in August, underlining prospects for slower economic growth and expectations the ECB may cut inflation forecasts and cease raising interest rates.

In early New York trade, the euro was down 0.6 percent at $1.4428, retreating from a two-month high of $1.4550 on Monday. Traders said a series of stop-losses were hit on the way down, with others lurking at $1.4370/60, in line with the euro's 100-day moving average.

"The Italian auction was relatively poor," said Adam Cole, global head of FX strategy at RBC Capital markets.

"The market is sensitive as to where the next pressure point in the euro zone periphery is going to be and right now that's looking like Italy," he added.

Against the yen, the euro was down 0.8 percent at 110.62 . Traders said the ECB bought significant amounts of 10-year Italian debt in a renewed attempt to support the market.

The dollar fell 0.1 percent against the yen at 76.72, staying above an all-time low around 75.94 set earlier in the month, as traders remained wary of possible yen-selling intervention by Japanese authorities.

Finance Minister Yoshihiko Noda, who oversaw Japan's massive intervention earlier this month, was voted in as prime minister on Tuesday, suggesting no changes in Japan's currency policy.

Market participants also awaited minutes from the Federal Reserve's policy meeting from Aug. 9 later in the day,

"Any suggestion that more stimulus may be needed to boost the US economy will likely spur selling in the dollar," Scotia's Sutton said.

Federal Reserve Chairman Ben Bernanke acknowledged slower-than-hoped-for growth in the US economy last week, but did not make clear the central bank would step in. He said it would hold a longer policy meeting next month to consider options.

Copyright Reuters, 2011