Euro zone ministers struggled to reassure financial markets that an aid package for Spain they outlined overnight will help stabilise the currency bloc - a task made all the harder by a German legal challenge to its crisis-fighting tools.
While the decisions were aimed at preventing the currency area's fourth-largest economy from needing a full state bailout, markets were disappointed the meeting did not offer more.
Investors remain on edge, awaiting a German constitutional court hearing on complaints about the ratification of the euro zone rescue fund and implementation of tough new budget rules.
A verdict, however, could potentially take a few weeks, which should leave markets on tenterhooks and possibly add to bearish sentiment towards the euro. The court is not known to be pro-Europe and an adverse verdict could hurt integration plans.
If it takes more than a few weeks it could raise serious doubts about whether Europe will really get the extra firepower it needs to combat the crisis.
"People have been selling into bounces as euro sentiment remains very low," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
"Euro weakness is partly a reflection of the unresolved issues in the euro zone and there is also a limit to how much the European Central Bank can ease, so now we are seeing easing through the currency," he said.
The euro fell as low as $1.2233, its lowest since July 1, 2010. It last traded at $1.2254, down 0.5 percent on the day.
The common currency also fell to a five-week low of 97.20 yen and last traded down 0.7 percent at 97.36, according to Reuters data.
Italy's Prime Minister Mario Monti, under intense market pressure to shape up his economy and avoid being drawn into the centre of the debt crisis, said the country could be interested in tapping the euro zone's rescue fund for bond support.
One bit of good news for the euro came by way of a drop in Spanish and Italian borrowing costs, with Spain's 10-year bond dipping back below the critical 7 percent level.
Analysts said the political hurdles on how to use the euro zone's rescue fund and prevent further contagion remained very high.
"I think we have a long way to go before we reach the stage at which policymakers will be ready to act, particularly as it relates to potential bond purchases in the secondary market," said Todd Elmer, currency strategist for Citi in Singapore.
Market expectations for the euro zone finance ministers' meeting had not been high to begin with but the outcome highlights a seeming lack of urgency on the part of policymakers, Elmer said.
Sterling, meanwhile, hit a fresh 3-1/2-year high against the euro as the market's focus switched back to the euro zone debt crisis, spurring the pound to recover from an early dip caused by comments from the Bank of England governor.
CHINESE TRADE DATA FANS GROWTH FEARS
China also weighed on markets after mixed trade figures raised concerns about an accelerating downturn in the world's second-largest economy.
China's imports in June grew at half the expected pace, underscoring concerns that China's economy and domestic demand are cooling quickly, although export growth was slightly stronger than expected.
Persistent concerns about global growth should limit the greenback's downside and boost the yen, added Western Union Business Solutions senior market analyst Joe Manimbo, in Washington D.C.
The US currency last traded down 0.2 percent against the yen at 79.42 yen, according to Reuters data.