THE euro fell below 87p sterling as analysts at Commerzbank said traders were buying the UK currency as "the euro without Greece".
Interest rates on Greek bonds suffered the biggest one-day rise since before the country joined the euro.
Finance Minister Brian Lenihan told a television interviewer that he was confident Greece would weather the storm; while the head of the International Monetary Fund, Dominique Strauss-Kahn, said he was sure Greece would remain in the single currency.
The yield on two-year Greek government debt surged by almost two-thirds of a per cent to 4.34pc. Earlier, it had been at 4.66pc -- a rise of almost 0.9pc and the biggest increase since 1998.
Rates on 10-year debt reached 6.17pc, giving the biggest spread over German debt since the depth of the general crisis in March. It compares with a 4.8pc yield on Irish 10-year debt -- the second highest in the euro area.
Greek spread have replaced Irish ones as the biggest in the euro area after markets reacted favourably to Mr Lenihan's extensive Budget correction measures.
The minister told CNBC television that he believed Greece would be able to cut its budget deficit, which is officially put at almost 13pc of GDP.
Athens also has to borrow to cover the existing deficit. The Greek finance ministry may sell five-year bonds privately to banks this month, one newspaper reported yesterday.
Greece issued bonds directly to selected investors last month, instead of offering them via auction or through a syndicate of banks, after its borrowing costs surged in the wake of three credit downgrades.
Analysts at Commerzbank in Frankfurt said sterling was strengthening because of a dearth of attractive alternatives for foreign-exchange traders.
"Many market participants still do not trust the dollar. They do not consider the euro as an alternative, due to the concerns surrounding Greece.
"The argument in favour of sterling is obvious.
"It is being bought as the euro without Greece," they said in a research note.