The latest jitters to hit the common currency underlined the risk of market contagion if European Union leaders, meeting on Thursday and Friday, cannot agree a safety net for Greece.

"There is still no agreement," one EU diplomat said after a day of frantic behind-the-scenes negotiations, especially between Brussels, Berlin and Paris.

"There is a lot of uncertainty at the moment. If nothing has been announced, it is because nothing has been agreed yet," another EU source said of efforts to arrange a special meeting of the 16-nation euro zone before or during the EU summit.

An EU diplomat said later that Greece would be discussed only if there were a chance of reaching an agreement on how the common currency area can help Athens cut its borrowing costs.

"Germany does not want to have a meeting of euro zone leaders unless there is a definite chance for a deal," said the diplomat, who has knowledge of the preparations.

Diplomatic sources said Germany and France were still discussing whether to involve the International Monetary Fund in any standby aid mechanism for Greece, and what form any additional contribution by euro zone states might take.

Athens revealed a huge budget deficit last October, shocking investors who sold off its government bonds. This sent Greek borrowing costs soaring, dealing Athens another blow as it tries to get the deficit down with u npopular austerity measures.

European Commission President Jose Manuel Barroso appealed to euro zone leaders to agree a contingency plan this week.

"It is now appropriate to create, within the euro area, an instrument for coordinated action which could be used to provide assistance to Greece in case of need," he told the European Parliament.

German officials said Berlin's drive to put the IMF at the centre of any rescue plan was gaining ground, but they did not expect any decisions on aid for Greece at the Brussels summit.

France and Spain have called for the special meeting of euro zone leaders on the sidelines of the summit, as Athens faces refinancing 20 billion euros of debt in April and May.

However, Dutch Prime Minister Jan-Peter Balkenende told parliament that the proposed meeting was "too risky."

Chancellor Angela Merkel, facing fierce opposition at home to any bailout for Greece, is also insisting as a condition for any support package that EU rules be rewritten to provide harsher punishment for deficit sinners.

PSYCHOLOGICAL IMPACT

Greece has not formally asked its EU partners for aid, but believes a support mechanism would ease pressure on it by dissuading speculators from pushing up its borrowing costs.

Fitch Ratings downgraded Portugal's sovereign debt rating by one notch to AA-, citing budgetary underperformance. The move put Fitch in between fellow credit watchdogs Moody's and Standard & Poor's, but had a stronger psychological impact due to the climate of uncertainty.

"The downgrade has more of an impact on the wider sovereign debt crisis, rather than Portugal at the moment," said Peter Chatwell, bond analyst at Credit Agricole in London.

The euro fell more than 1 percent against the dollar to $1.3335, its lowest since early May 2009. Portuguese shares also fell and the risk premium on Portuguese and Greek debt over German bonds widened as markets digested the news.

Greece needs to borrow some 16 billion euros between April 20 and May 23 alone to refinance maturing debt. At current market rates it would have to offer a 6.5 percent yield, more than double the 3.1 percent on 10-year German government bonds.

But the German official reiterated that any rescue mechanism must apply only if Athens were unable to borrow on the markets.

EU governments hope that any agreement on a fallback mechanism would be sufficient to convince markets to narrow the spreads on Greek and other peripheral euro zone countries' debt.

France has resisted a role for the IMF inside the euro zone, arguing it would be a political humiliation and signal to markets that the region could not solve its own problems.

However, diplomats said Paris now seemed willing reluctantly to concede a role for the IMF as the price for securing German backing for a rescue mechanism.

(Additional reporting by Harry Papachristou in Athens, Paul Carrel in Berlin and Jan Strupczewski in Brussels; writing by Paul Taylor; editing by Philippa Fletcher/David Stamp)