Mr Romano Prodi, president-designate of the European Commission, has triggered a drop in the euro's value after suggesting that Italy could drop out of the euro-zone because of a lack of industrial competitiveness.

In remarks that caused confusion in financial markets, Mr Prodi, a former Italian prime minister, suggested yesterday that Italy "will not be able to stay in the euro" if it failed to lower costs and its inflation rate to match its European partners.

Mr Prodi, who will take over as Commission president in September, later qualified the comment, made to leading figures from the Italian chemical industry. He insisted he had been "reported in a very ambiguous and wrong way".

The euro dropped more than half a cent against the dollar in the few minutes after Mr Prodi's comments. His later clarification failed to reverse the movement, and the euro closed at the end of European trading about $1.032, half a cent above its lifetime low.

Market analysts said that, while it was now clear that Mr Prodi's remarks had been lifted out of context, they added to fears that senior figures in the European Union were failing to comment on the euro-zone economy in a co-ordinated fashion.

"This is the first time a senior European official has publicly mentioned the prospect of a country withdrawing from the euro. It raises the question of Mr Prodi's suitability to lead the Commission," said Mr Chris Iggo, senior international economist at Barclays Capital in London. "He should be far more sensitive to the potential of his comments to upset the markets."

"This was a bad error in communication," said Mr Marcello Esposito, senior economist at Banca Commerciale Italiana in Milan. "Prodi was addressing a domestic audience on the state of the Italian economy but he failed to realise the wider impact of his comments now that he is has taken on a bigger job."

Mr Prodi was reported to have said that Italy's inflation rate made it uncompetitive.

"We have had a very low inflation rate of only around 2 per cent but other European competitors have 1 per cent," news agencies reported Mr Prodi as saying.

"If our costs diverge and we continue on this path we will not be able to stay in the euro."

He added that it would be a tragedy for Italy if it continued to have higher costs, warning that the euro was "a great opportunity but if you don't make radical choices it becomes a penal sentence". Mr Prodi later insisted that he had only been talking about "a teeny, tiny difference in inflation" that "doesn't cause any worry in the short or medium term".

Mr Brian Martin of Barclays Capital said: "It is likely that Prodi's comments on EMU were meant not as an attack on EMU but rather a warning to Italy not to relax its endeavours towards achieving further economic reform."

News that the Bank of Japan had again stepped into the market buying the euro for yen in an effort to cap the latter's appreciation, did little to help sentiment towards the single currency.