01/11/2012 01:42 EST | Updated 03/12/2012 05:12 EDT

Euro falls on worries of deepening debt crisis

The euro fell Wednesday, a day ahead of a closely watched meeting of the European Central Bank and as comments by an official with Fitch Ratings added to worries that Europe’s debt crisis will spread.

The euro was trading down 0.6 per cent at $1.2702 US early in the afternoon, after dropping as low as $1.2661 earlier in the day, its lowest point since Sept. 10, 2010.

European markets closed in the red with London's FTSE 100 index off 0.45 per cent, Frankfurt's DAX down 0.17 per cent and the Paris CAC 40 dipping 0.19 per cent.

The ECB’s monetary policy committee will hold its monthly meeting tomorrow and the consensus among economists surveyed by Bloomberg News is that it will keep its key interest rate unchanged at one per cent.

It has already dropped the rate by a quarter-point at each of its last two meetings.

The head of Fitch’s sovereign ratings, David Riley, said the ECB should increase its efforts to buy the bonds of Europe’s troubled countries in order to avoid a collapse of the 17-nation currency.

Both Fitch and rivals Standard & Poor’s and Moody’s have warned they are reviewing the ratings of eurozone countries and may announce downgrades.

German Chancellor Angela Merkel told journalists after meeting in Berlin Wednesday with Italy’s Prime Minister Mario Monti that Germany might increase its contribution to Europe’s bailout fund to send the message that European leaders are ready to ease the crisis.

The drop in the euro came amid other troubling signs that the region may already be in recession and that the debt crisis could deepen.

German economy likely contracted

Germany’s Federal Statistics Office said Europe’s largest economy likely contracted by 0.25 per cent in the last quarter of 2011 despite showing strong overall growth for the year of three per cent.

The exact figure for fourth-quarter growth is due only in mid-February and could be revised.

Speculation rose that the Bank of England will move to stimulate its economy after new figures showed the U.K. trade deficit increased more than expected.

Meanwhile, the European Union stepped up the pressure Wednesday against Hungary, saying its fiscal policies were unsustainable and threatening legal action over a new constitution that some fear could push the country back into authoritarianism.

The warnings escalated the standoff between Hungary's government and the EU and underlined the difficulty Budapest will face in negotiating a desperately needed international rescue package from the EU and the International Monetary Fund.

And Spain's parliament approved the new conservative government's first austerity measures Wednesday, which aim to rein in the country's swollen deficit with €8.9 billion ($11.5 billion) in spending cuts.

"The economy is stopped, we're on the verge of a recession and the accounts are unbalanced as a consequence, among other things, of the deplorable decisions taken by the former government, which only made the situation worse," Finance Minister Cristobal Montoro told legislators.

Spain is trying to avert being dragged further into a debt crisis that has already forced Greece, Ireland and Portugal to seek financial bailouts.