NEW YORK The euro and stocks fell for a third day on Tuesday as moves by officials to stem the European debt crisis failed to allay concerns that the risk was spreading to Italy and Spain.
Gold rallied to near its all-time high and U.S. bond prices rose as worries about contagion pushed investors into safe-haven assets.
"Caution is clearly warranted given all the possible outcomes of these events," said Gibson Smith, co-chief executive officer of fixed income at Janus Capital Group in Denver.
Investors have been worried about the potential effect on the global economy, especially as the U.S. recovery has struggled to pick up speed.
In a bid to keep Italy and Spain from the same fate as Portugal and Ireland, euro zone finance ministers on Monday promised cheaper loans, longer maturities and a more flexible rescue fund.
But they set no deadline and Dutch Finance Minister Jan Kees de Jager said a selective default for Greece was no longer being excluded.
Fears about Italy have accelerated concerns over the impact of the debt crisis because the country is the euro zone's third-largest economy.
Adding to pressure on the euro, late in the U.S. session, Moody's cut Ireland's credit rating to junk status.
"The market has woke up to the fact that there's a much larger problem (than Greece). That's what precipitated the large fall (in the euro)," said Adam Myers, senior FX strategist at Credit Agricole CIB. "I very much doubt the European Central Bank, let alone the IMF, can bail out a country the size of Italy."
On Wall Street, stocks ended lower after a volatile session, as the fiscal problems in Europe and a weak start to technology earnings kept investors from buying.
The Dow Jones industrial average .DJI fell 58.88 points, or 0.47 percent, to end at 12,446.88. The Standard & Poor's 500 Index .SPX was down 5.85 points, or 0.44 percent, at 1,313.64. The Nasdaq Composite Index .IXIC lost 20.71 points, or 0.74 percent, at 2,781.91.
Earlier, European stocks hit a four-month low and closed down for a third straight day. Shares also tumbled overnight in Asia on fears about the European debt crisis.
The pan-European FTSEurofirst 300 .FTEU3 closed down 0.54 percent at 1,091.72, off its session lows.
The MSCI world equity index .MIWD00000PUS fell 0.8 percent.
The euro fell to its lowest level against the dollar in four months and hit another record low against the Swiss franc.
Ireland's rating cut gave investors more evidence to suggest the euro zone problems are far from over. The ratings agency said the country will likely need additional rounds of financing before it can return to capital markets.
The euro fell as low as $1.3835, a four-month low, but it was last down 0.4 percent at $1.3974.
Providing some support to markets, traders cited rumours that the European Central Bank was buying peripheral bonds for the first time in three months, with Portugal the suspected target.
The crisis kept bond prices higher. The benchmark 10-year Treasury note last traded up 4/32 in price with a yield of 2.91 percent, down 1.4 basis points from late Monday.
U.S. Treasuries briefly turned flat after minutes released from the Federal Reserve's last policy meeting on June 21-22 hinted that policy makers left the door open for more stimulus if U.S. growth were too slow to reduce unemployment.
Spot gold was up 1 percent at $1,568.89 an ounce. U.S. COMEX August gold futures settled up $13.10 at $1,562.30, after trading between $1,541.10 and $1,574.30.
Gold in euros rose for a third day, climbing 1.5 percent to hit a record above 1,123 euros.
"With the euro zone debt crisis and the U.S. debt ceiling talks, there is a tremendous flight to quality. Gold is the commodity to invest in because the currencies aren't doing well," said Mihir Dange, COMEX gold options floor trader for Arbitrage LLC.
Oil prices also ended higher ahead of inventory reports, after trading lower early in the session.
On the New York Mercantile Exchange, crude for August delivery settled at $97.43 a barrel, gaining $2.28, or 2.4 percent.
In London, ICE Brent crude for August delivery recovered from two straight days of losses and settled at $117.75 a barrel, up 51 cents, or 0.44 percent.
(Additional reporting by Neal Armstrong, Steve Slater and Naomi Tajitsu in London and Julie Haviv, Richard Leong, Frank Tang and Chris Reese in New York; Editing by James Dalgleish and Dan Grebler)