that no country in the region was immune from the debt crisis.
The German manufacturing report further unnerved investors already worried not only about Greece but also the risk that other similarly indebted countries such as Spain could also exit the regional bloc or default on its debt.
The euro, however, managed to recoup some losses to trade just slightly lower on the day as investors consolidated short positions ahead of a long U.S. holiday weekend. But any rebound could be fleeting.
Paul Dietrich, chief executive officer at Foxhall Capital Management in Orange, Connecticut said Greece's problems have already been priced in by the market.
"What investors are worried about is a banking crisis in Europe. Mainly they are looking at who is the next one to exit," said Dietrich. "If Spain starts looking likely that it could leave the European Union or default on its debt, then you're going to see a major banking crisis in Europe because European banks hold massive amounts of Spanish debt."
Dietrich has retained a defensive stance in his portfolio, with 70 percent of its holdings in short-term U.S. Treasuries.
The weaker-than-expected Ifo business climate index and manufacturing PMI data for May suggested that growth in Europe's largest economy that has helped the currency bloc dodge recession may be starting to slow.
Signs of a downturn across the region, banking sector problems in Spain and the risk of contagion ensnaring bigger economies are all combining to keep euro bears firmly in control, with some investors targeting $1.20 in coming weeks.
The euro dropped sharply to $1.25155 on trading platform EBS, its lowest level since July 2010, before recovering to hit session highs at $1.26209 as some investors booked profits on bearish positions initiated earlier.
The euro was last at $1.2564, down 0.1 percent on he day. Gains in the euro zone common currency versus the Swiss franc also helped the euro's cause against the dollar, traders said.
Early in New York trading, the euro jumped to 1.2075 francs , its highest since late March on speculation that the Swiss government is going to impose tax on deposits, traders said. The euro last traded at 1.2034 francs, up 0.2 percent on
the day.
Traders reported an options barrier at $1.2500 with more stop-loss orders cited at $1.2480.
The euro has lost 1.6 percent against the dollar so far this week with sentiment already fragile after a European Union leaders summit on Wednesday failed to shed new light on how they might tackle the euro zone debt crisis.
"After the (EU) summit without any results we have still got a lot of uncertainty in Greece. The last thing we need in this situation is the German economy getting into trouble," said Lutz Karpowitz, currency strategist at Commerzbank.
Real money investors and macro funds have stepped up selling of the euro in recent days as concerns Greece might quit the euro zone intensified. Fears of a Greek exit have mounted after an inconclusive election this month left the country on the path to bankruptcy and raised the risk of contagion.
Three officials told Reuters on Wednesday that members of the currency bloc have been told to prepare contingency plans in case Greece quits the euro, an eventuality that the German central bank said would be testing but
"manageable".
Greeks will vote again on June 17, with polls showing a neck-and-neck race between parties supporting and opposing terms of the country's international bailout, keeping markets on edge.
BROAD DOLLAR STRENGTH
European Central Bank data showed 35.4 billion euros of net direct portfolio investment flowed out of the euro zone in March, suggesting investors are starting to shun the region's assets.
The poor German economic data led more investors to the safety of the dollar and the yen. The euro was down 0.1 percent against the yen at 99.86 yen, having fallen to 99.33 yen, its lowest since Feb. 1.
The dollar index climbed to a 20-month high of 82.362, while the greenback rose to a 15-month peak versus the Swiss franc of 0.95959 francs on trading platform EBS.
The greenback was steady at 79.41 yen, showing limited reaction after Bank of Japan governor Masaaki Shirakawa said the central bank was resolved to maintain its ultra-loose monetary policy but would not ease solely to weaken the yen.
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