The euro fell to its lowest against the dollar since early October on Wednesday, hurt by signs that the euro-zone debt crisis was starting to threaten Germany and France, the region's biggest economies. The euro fell to a low of $1.3371, its weakest since October 7, after Germany suffered one of its least successful debt auctions since the single currency was launched, while ratings agency Fitch said the crisis was starting to put France's cherished triple-A rating at risk. The auction was a dangerous sign that the euro zone's prime asset was starting to lose its appeal to investors frustrated by the absence of new measures from policy-makers to halt the bloc's debt crisis. "Mounting global economic and financial market uncertainty sent investors seeking the relative safety of the world's most liquid market," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Overnight data showed a massive contraction in Chinese factory sector activity and a German bund auction found dismal demand from private investors. The combination of negative developments continued to favor the safe-haven U.S. dollar." Many expect that the longer the crisis lingers, the more likely it is that paymaster Germany will have to dig deep into its pockets to bail out Europe's weaker nations. Fitch on Wednesday said an intensification of the euro-zone crisis and the risk of an economic downturn could threaten France's rating. The warning added to brewing speculation about an additional fiscal burden for France. Earlier in the day, Belgian newspaper De Standaard reported Belgium and France were in fresh talks to rescue ailing bank Dexia. Although it also quoted Belgium's Finance Minister Didier Reynders as denying the accord between the two states to rescue the bank would be dismantled, this did little to reassure investors. A French Finance Ministry source said a renegotiated deal was out of the question. The euro was last down nearly 1 percent at $1.3395. Demand from a U.S. bank to buy the euro around the day's low held the currency back from more losses for the moment, but few in the market expected much recovery, with London traders saying a rise above $1.3400 would give a good chance to sell. On the downside, talk of option barriers at $1.3350 would likely to give it near-term support. Against the yen, the euro fell 0.6 percent to 103.33 yen. BRITTLE SENTIMENT Risk appetite also took a hit after the HSBC flash manufacturing purchasing managers' index (PMI) showed China's factory sector shrank the most in 32 months in November as new orders slumped. The euro zone's private sector shrank for a third month as the debt crisis pushed the region to the brink of a recession. Persistent worries over the euro zone's debt crisis and signs of dollar funding strains have kept sentiment brittle. "The talk about Dexia and the Chinese flash PMI are the two factors that are driving risk-off trade," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "Model funds are looking to buy dollars and investors will be looking to sell into any rebound in the euro." Front-end euro/dollar volatilities picked up as spot euro fell, with the one-month rising to 15.85 percent from 15.50 before the German bond auction. The U.S. dollar rose 0.3 percent to 77.16 yen with offers from Japanese exporters cited above 77.40. (Reporting by Nick Olivari; Additional reporting by Anirban Nag in London; Editing by Jan Paschal)

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