NEW YORK (Reuters) - The euro hit a 10-week low against the dollar and stocks fell for a second day on Tuesday on fears Europe's debt crisis is far from contained after Ireland's financial rescue.
Gold rallied to a 2-1/2 week peak and U.S. government bond prices rose as concern over sovereign debt levels in European countries fueled buying of safe-haven assets. Oil slipped closer to $85 a barrel as the dollar rose.
Manufacturing in the U.S. Midwest grew faster-than-expected in November and U.S. consumer confidence gained, data showed. Nevertheless, markets were dragged lower by deepening uncertainty about the outlook for the euro zone.
Two days after Europe approved an 85 billion euro ($111.7 billion) emergency aid package for Ireland, worries about contagion to Portugal and Spain persisted and the borrowing costs of large countries like Italy and France shot higher.
"The European credit market is in panic mode because of fears of insolvency (for some euro zone countries) and the euro is trading off those credit yields," said Boris Schlossberg, director of FX research at GFT in New York.
"For the euro to stabilize, credit yields need to stabilize and for that to happen, we need action from the European Central Bank. The Irish bailout was not enough and so the pressure is building."
In tandem with euro weakness, the premium investors demand to hold Spanish and Italian sovereign bonds over German bonds hit their highest since the euro's launch, while some of the region's "core" debt issuers, including France, were pressured.
European stocks ended flat struggling to halt a sharp three-week sell-off as investors continued to dump banking shares on mounting fears of a domino effect in the euro zone after Ireland's bailout.
The FTSEurofirst 300 .FTEU3 index of top European shares closed 0.03 percent higher at 1,069.52 points, but the index suffered a 1.6 percent loss for November, its first monthly loss since August.
U.S. stocks were weaker as the latest data on home prices signaled rough recovery ahead and added to worries of the euro debt crisis.
"We are starting to see many warning signs of global contagion, including lower U.S. stock prices," said Zach Pandl, economist at Nomura Securities International in New York.
The Dow Jones industrial average .DJI was down 32.77 points, or 0.30 percent, at 11,019.72. The Standard & Poor's 500 Index .SPX fell 5.51 points, or 0.46 percent, at 1,182.25, while the Nasdaq Composite Index .IXIC dropped 25.19 points, or 1.00 percent, at 2,500.03.
U.S. consumer confidence rose in November to its highest in five months and U.S. Midwest business activity grew faster than expected, signs that the economy is moving forward.
But the latest S&P/Case-Shiller home prices data disappointed investors, as monthly prices fell more than expected in September, and prices from a year earlier rose more slowly than forecast.
MSCI's all country world index .MIWD00000PUS was down 0.43 percent.
Markets are already discounting an eventual rescue of Portugal although the government in Lisbon denies the country needs outside aid, much as Ireland did before its bailout.
While a Portuguese rescue would be manageable, assistance for its larger neighbor, Spain, would sorely test EU resources, raise deeper questions about the integrity of the 12-year old currency area and possibly spread contagion beyond Europe.
The euro fell below the critical $1.30 level to $1.2977, its lowest since mid-September, before bouncing back to $1.3027 amid fear of regional contagion and uncertainty over the currency's future.
With the spotlight on the euro, the dollar continued to gain, hitting a more than two-month high at 81.444 against a currency basket .DXY, before backing to 81.119, lifted by safe-haven flows and recent evidence of an improving U.S. economy.
U.S. Treasury prices rose, adding to the previous day's gains, as investors turned to government debt as a safe haven from the recent flare-up in volatility.
The benchmark 10-year U.S. Treasury note was up 15/32, with the yield at 2.7694 percent. The 2-year U.S. Treasury note was up 3/32, with the yield at 0.4607 percent. The 30-year U.S. Treasury bond was up 34/32, with the yield at 4.0809 percent.
Spot gold rose $23.11, or 1.69 percent, to $1,389.50 an ounce, a 2-1/2 week-high as investors bought the metal as a safe store of value.
U.S. crude oil futures fell 58 cents, or 0.68 percent, to $85.15 per barrel.
Additional reporting by Rodrigo Campos, Gertrude Chavez-Dreyfuss in New York and Elizabeth Fullerton and Tamawa Desai in London; Editing by Kenneth Barry