THE WORST-received German bond sale since the euro’s launch fuelled fears that the Continent’s debt crisis was now affecting Berlin, the region’s biggest economy and key to the survival of the single currency.

The bond auction only managed to raise two-thirds of the amount targeted. Investors and banks shunned the offering due to worries that Europe’s monetary union project could collapse because of deteriorating market sentiment and the region’s huge public debt.

The euro, which has held up relatively well despite the bond market turmoil, suffered one of its biggest one-day falls against the dollar this year, while euro zone government debt was sold off across the board.

A spokesman for the German debt agency, which oversees the auctions, said: “We are seeing no indication that investors might be losing their appetite for bunds . . . We shouldn’t overinterpret today’s result.”

Some market participants said low German yields may have put off some buyers. The average yield in the auction was a historically low 1.98 per cent. Investors have bought bunds heavily recently as they moved out of peripheral euro zone debt.

But as fear spread across trading floors, Germany started to trade like a risk asset, with bund yields, which have an inverse relationship with prices, rising roughly in line with French, Italian, Spanish and Belgian yields. But yields on short-term German debt went into negative territory – a sign Berlin is still seen as a haven by some.

Ewald Nowotny, a European Central Bank policymaker and head of Austria’s central bank, said the German bond sale was an “alarm signal”, while investors, traders and strategists warned it may prove a tipping point.

Don Smith, economist at Icap, the interdealer broker, said: “This is just one auction, but there is a growing feeling among many in the markets that the crisis is heading one way – and that is towards the break-up of the euro zone.”

In Brussels, José Manuel Barroso, the European Commission president, warned the euro would be “difficult or impossible” to sustain without tighter economic integration. He presented plans to curb the fiscal excesses of national governments and introduce a joint “eurobond” to replace national debt issuance. His proposals would give Brussels new powers to assess and object to national budgets before they are published. But Angela Merkel, the German chancellor, described the eurobond plan as “extraordinarily inappropriate” and “troubling”.

“It is a complete and utter disaster,” said Marc Ostwald, strategist at Monument Securities in London. “This does not bode well. It is the worst of the uncovered auctions that we’ve had this year and little wonder that the bund sold off on the back of it.”

Banks bid for far less at the sale than the debt agency’s target, meaning the auction was technically “uncovered”. Uncovered auctions are not uncommon for Germany, but the scale of the Bundesbank retention was exceptional.

Bunds are starting to lose their appeal because markets have to believe the eurobonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries, said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.

Highlighting that the move away from German debt has been happening for some time, foreigners’ net buying of German bunds in the third quarter of 2011 fell to €9 billion from over €30 billion, according to balance of payments data from the Bundesbank.

“What we are doing is not getting involved in any of the periphery or core countries apart from bunds, but even in bunds we are finding it more difficult,” said Sanjay Joshi, head of fixed income at London Capital.