"Disastrous" bond sale rattles Germany

A special report by Fitch Ratings suggested France had limited room left to absorb shocks to its finances, such as a new downturn in growth or support for banks, without endangering its triple-A credit status.

"The debt crisis is burrowing ever deeper, like a worm, and is now reaching Germany," one of the more eurosceptic backbenchers in Angela Merkel's centre-right government, Frank Schaeffler of the junior coalition partner Free Democrats (FDP), told Reuters.

Merkel, French President Nicolas Sarkozy and new Italian Prime Minister Mario Monti are to meet in the French city of Strasbourg later today.

The three leaders are expected to discuss the reforms planned by former EU commissioner Monti at a meeting they hope will allow Italy to put behind it the era of former Italian prime minister Silvio Berlusconi, who resigned earlier this month.

Underlining how deep the euro zone crisis has become, the German debt agency could not find buyers for almost half a bond sale of €6 billion. That pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.

The new bond promised to pay out a 2.0 percent interest rate - the lowest ever on an issue of German 10-year Bunds. The auction's average yield was 1.98 percent, down from 2.09 percent for the previous benchmark in October.

The poor debt sale by Europe's powerhouse economy pushed the euro down to 1.336 against the dollar and European shares sank to 7-week lows.

Bunds slumped after the auction. Ten-year yields rose 14.5 basis points to 2.056 percent, yielding more than U.S. Treasury notes for the first time since early last month.

German finance minister Wolfgang Schaeuble's spokesman told a news conference that the auction did not mean the government had refinancing problems and few on financial markets disagreed.

But it was a sign that, as the bloc's paymaster, Germany may slowly be pressured if the crisis continues to deepen. One senior ratings agency official said it could give Berlin cause to re-examine its refusal to embrace a broader solution.