The euro slid to a four-month low against the dollar today and was expected to remain under pressure as concerns grow about problems facing some periphery euro zone banks and the prospect of contagion if Greece exits the euro.

Growing aversion to risk drove investors towards the safety of the U.S. dollar, which rose to a four-month high against a basket of currencies, while the euro also dropped to a three-month low versus the yen.

Talk of possible Spanish bank downgrades pushed European equities sharply lower. Shares in Spanish lender Bankia fell more than 20 percent following a report in the El Mundo newspaper that its customers had withdrawn more than 1 billion euros from their accounts over the past week.

This followed news on Wednesday that the European Central Bank had stopped providing liquidity to some Greek banks because they had not been successfully recapitalised.

Investors were increasingly worried that Greece could leave the euro following a second election to be held on June 17 as voters looked likely to opt for parties opposed to the terms of its international bailout.

The euro dropped to $1.2667, its lowest level since mid-January, past stop-loss sell orders below $1.2680 and on course for a test of its 2012 low of $1.2624.

"If we get a bad outcome (from the second election) then the probability of Greece leaving increases, which could lead to a sell-off of the Euro, trading to a target of around $1.15," said Geoff Kendrick, strategist at Nomura.

Higher yields for Spain at an otherwise well-received bond auction on Thursday reinforced concerns that its borrowing costs may become unsustainable as markets worry that the crisis could spread to other indebted euro zone countries. Data on Thursday showed Spain contracted by 0.3 percent in the first quarter, putting it firmly in recession after it shrank by the same pace in the fourth quarter. The dollar index climbed to a four-month high of 81.682 as investors sought safety, while the euro also fell to 101.59 yen on trading platform EBS, its weakest since mid-February. (C ) Reuters