Meanwhile international monetary policy was in focus after Australia raised interest rates for a second month running and the Federal Reserve prepared to begin its latest meeting.

In late morning London deals, the European single currency hit a one-month low of 1.4636 dollars compared with 1.4772 dollars late in New York on Monday.

Against the Japanese currency, the dollar dropped to 89.98 yen from 90.33 yen late on Monday. Tokyo markets were shut due to a public holiday in Japan.

“The euro has broken down through 1.4700 dollars and stocks are registering hefty losses as the market takes risk off the table in the wake of another run of bad news from the banking sector,” said analyst Jane Foley at online trading firm Forex.com.

Britain on Tuesday said it would force state-rescued Royal Bank of Scotland and Lloyds to sell assets in a bid to revive the sector and address EU concerns, and inject another 30 billion pounds into them.

The government hopes to create new banks, promote competition and guarantee more lending to businesses and individuals as a result of the sale, which will add up to around 10 percent of Britain’s troubled retail banking market.

In return for the state aid, the two banks will have to cut their bonuses.

The news weighed on stock markets, with London’s FTSE 100 index of top shares tumbling 2.12 percent to 4,996.53 points — below the psychological 5,000 barrier for the first time since October 5.

Also on Tuesday, the foreign exchange market digested news that Australia’s central bank had decided to hike interest rates by 25 basis points.

Central bank governor Glenn Stevens said the bank had decided to up the official cash rate to 3.50 percent, its highest level since February, citing “noticeably better” conditions for Australia’s major regional trading partners.

Australia last month became the first advanced economy to raise interest rates since the global financial meltdown, declaring the risk of a recession over and lifting rates from 50-year lows.

The US Federal Reserve (Fed) is widely expected to hold its key lending rate steady with a range of zero to 0.25 percent until early 2010, in a decision due Wednesday. Interest rate decisions from the European Central Bank and Bank of England are due a day later.

In London on Tuesday, the euro was changing hands at 1.4636 dollars against 1.4772 dollars late on Monday, at 132.40 yen (133.44), 0.9032 pounds (0.9028) and 1.5118 Swiss francs (1.5094).

The dollar stood at 89.98 yen (90.33) and 1.0273 Swiss francs (1.0218).

The pound was at 1.6296 dollars (1.6404).

On the London Bullion Market, the price of gold fell to 1,060 dollars an ounce from 1,062 dollars an ounce late on Monday.