LONDON (Reuters) - Doubts that EU leaders can agree any effective action on the euro crisis at a summit this week kept the currency languishing close to a two-week low against the dollar on Tuesday and contributed to a near tripling of Spain's short-term borrowing costs.
Equity markets, however, staged fragile recoveries from Monday's sharp selloff with Europe's broad STOXX 600 index gaining 0.1 percent and U.S. stock futures pointing to a rise on Wall Street. .N
Spain's formal request on Monday for European aid along with a mass downgrade by Moody's of 28 of its banks, plus news that Cyprus had become the fifth euro zone nation to request a bailout, kept the appetite for riskier assets low.
"There is increasing pessimism as to whether any degree of substantive action will be agreed at the summit," said Jeremy Stretch, head of currency strategy at CIBC. "The most encouraging thing is that no one has any expectations, but that's as good as it can get."
The euro was mostly flat against the dollar at $1.25 after falling to $1.2471 on Monday, its lowest since June 12. However, the common currency hit a two-week low against the yen and a near-four-week low against the British pound.
The two-day summit in Brussels on Thursday and Friday will be the 20th time European Union leaders have met on resolving a crisis that has spread across the euro zone since it began in Greece in early 2010.
Doubts about the outcome are being fed by Germany's resistance to the idea of common euro zone bonds, seen by many in the currency bloc as the best solution to ending the debt crisis and cementing the future of the currency.
German Chancellor Angela Merkel said on Monday that sharing the debt liability within the 17-nation euro zone would be "economically wrong and counterproductive".
Finance ministers of the four biggest euro zones economies were holding last-minute talks in Paris on Tuesday to try to narrow differences on how to manage the crisis in the short term and how to achieve long-term fiscal and banking integration.
The summit will discuss a plan to create a euro zone treasury which could issue regionally-backed bonds as the final stage of a fiscal union, but with a recognition that this may take years to implement.
"In a medium-term perspective, the issuance of common debt could be explored as an element of such a fiscal union and subject to progress on fiscal integration," a document prepared for this week's summit and obtained by Reuters stated.
Fears that the summit will be short on action drove up yields on the debt of Italy and Spain. Italy's 10-year bonds rose 6 basis points to 6.08 percent, with Spain's equivalent up seven basis points at 6.71 percent.
Spain also had to pay its highest short-term borrowing rates in over six months when it sold just over 3 billion euros ($3.8 billion) of three- and six-month Treasury bills. <ID:L6E8HQ4HM>
The yield paid on the three-month bills was 2.362 percent, up from just 0.846 percent just a month ago. For the six-month paper, it leapt to 3.237 percent from 1.737 percent in May.
Spain's inability to stop the spiraling of its debt pile amid a tough recession, to clean up its fragile banking system, and to keep its regional governments from overspending have kept it at the centre of worries over the spreading euro zone crisis.
Yields on normally safe-haven German debt were also rising with 10-year bonds up five basis points to 1.517 percent as some investors worry about the impact the debt crisis will have on the region's largest economy.
"Germany cannot support the euro zone by itself without its debt burden rising explosively and trend growth falling as a consequence, or without bringing its precarious banks dangerously close to the brink of collapse," said Stephanie Kretz, part of the investment strategy team at Lombard Odier.
Bank of England Governor Mervyn King joined in the criticism of a lack of action by European leaders, saying the outlook for Britain's economy has worsened over the past few weeks due mainly to turmoil in the euro zone.
"I am pessimistic (about the euro zone outlook). I am particularly concerned because over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road," King said.
In equity markets the STOXX 600 index of large companies across the European region snapped a three day losing streak to gain 0.1 percent to 243.05 points while the FTSEurofirst 300 index .FTEU3 also rose 0.14 percent at 987.78 points.
But traders said the gains were likely to be only temporary after both indexes posted their biggest one-day falls in more than three weeks on Monday.
"All the European markets are looking a little bit oversold, but we would still be looking to sell into any strength," Central Markets senior broker Joe Neighbour said.
MSCI's world equity index .MIWD00000PUS also reversed three days of loses to gain 0.8 percent, leaving intact its recovery this month after sharp falls in May.
In commodity markets Brent crude oil climbed toward $92 a barrel, gold held steady around $1,580 an ounce while copper rose but activity was subdued due to the approach of the EU summit.
Rising tension between Syria and Turkey was supporting prices after NATO member states condemned Damascus for shooting down a Turkish military jet last week.
Additional reporting by Jessica Mortimer Editing by David Stamp