The euro has rallied off new lifetime lows, which had put the currency close to parity with the dollar. The euro found some support as dealers said European central banks bought the currency for dollars in commercially-driven operations.

Officials from the ECB and the Bundesbank declined to comment on any action the banks may have taken.

Many traders expect the euro to hit parity with the dollar amid pessimism over the euro-zone economies, after data showed German May retail sales had fallen 2.8 per cent year-on-year.

Underlining the difficulties in Germany, DIW, one of the six leading economic research institutes in Germany, yesterday said it was even less optimistic about the prospects for economic growth this year, but predicted a pick-up in growth in 2000. It has cut its 1999 growth forecast from 1.4 per cent to 1.3 per cent.

By late yesterday, the euro had staged a rally and was at $1.0176 at yesterday's close, up from $1.0139 on Monday. However, it had edged down to $1.0165 in later dealing in the US market.

In share markets, investors were shaken by news from Argentina, which has highlighted the depth of the country's economic recession.

The Argentine stock market had closed down 8.66 per cent on Monday, in a slump that affected neighbouring countries as well as the United States and Europe. However, it recovered ground yesterday as analysts argued that investors had over-reacted and by late yesterday the index of Argentine shares was up by more than 4 per cent.

Among the triggers for Monday's fall of the Argentina bourse were comments from a candidate in the September presidential elections, who suggested that Brazil would cease to pay its external debt.

But Peronist presidential candidate Eduardo Duhalde denied he was seeking debt forgiveness, insisting he was only expressing support for the Roman Catholic Church's calls for debt relief for the poorest countries.

Europe's major bourses - London, Frankfurt and Paris - all closed more than 1.3 per cent weaker. In Dublin, the ISEQ index of Irish shares lost 1.4 per cent, with the bank shares slipping.

Spain's Ibex-35 blue-chip index shed almost two per cent due to the exposure among Spanish firms to Latin America.

Germany's DAX index fell 1.38 percent, under pressure from Wall Street and from profit-taking in bank shares after recent sharp gains in that sector.