Prices of US government bonds rose and gold hit a record high as investors spooked by fears of contagion sought safety. Investors are worried the potential effect on the global economy, especially as the US recovery has struggled to pick up speed.

In a bid to keep Italy and Spain from the same fate as Greece, Portugal and Ireland, euro zone finance ministers promised Monday cheaper loans, longer maturities and a more flexible rescue fund.

But they set no deadline, and the Dutch finance minister, Jan Kees de Jager, said a selective default for Greece was no longer being excluded.

"The situation in Europe continues to deteriorate and uncertainties within the sovereign credit space remain high," said David Ader, head of government bond strategy at CRT Capital in Stamford, Connecticut.

Fears over Italy have accelerated concerns over the impact of the debt crisis because the country is the euro zone's third-largest economy.

In equities markets, European stocks fell after shares tumbled overnight in Asia on fears over the European debt crisis. But on Wall Street, stocks largely managed to edge higher a day after posting their worst day in a month.

Helping support markets, traders cited rumors that the European Central Bank was buying peripheral bonds for the first time in three months, with Portugal the suspected target.

The pan-European FTSEurofirst 300 provisionally closed down 0.5 percent at 1,092.31 points, off its session lows.

In Asian markets, Japan's Nikkei stock index closed off 1.4 percent, in the biggest fall in a month and Hong Kong shares posted their biggest daily fall in 14 months.

The Dow Jones industrial average was up 8.86 points, or 0.07 percent, at 12,514.62. The Standard & Poor's 500 Index was up 0.87 points, or 0.07 percent, at 1,320.36. The Nasdaq Composite Index was down 5.75 points, or 0.21 percent, at 2,796.87.

In the foreign exchange market, the euro was last trading at $1.3989, down about 0.3 percent on the day, after earlier hitting hit four-month lows of $1.3837. It also fell to a record low against the safe-haven Swiss franc.

The euro zone concerns helped lift bond prices, as investors sought safer assets. The benchmark 10-year US Treasury note was up 4/32, its yield at 2.9097 percent.

"The market has woke up to the fact that there's a much larger problem (than Greece). That's what precipitated the large fall," Adam Myers, senior FX strategist at Credit Agricole CIB, said of the fall in the euro. "I very much doubt the European Central Bank, let alone the IMF, can bail out a country the size of Italy."

There was some respite for Italian assets after speculation swirled that the European central bank was buying Italian and Spanish paper, even though traders who usually see those transactions said they had seen no evidence of such trades.

The costs of insuring against a default by the euro zone's peripheral issuers hit record highs, and Italian and Spanish bond yields spiked higher.

Brent crude oil futures fell 57 cents to $116.67 on fears about slowing energy demand.

Euro-priced gold rose to a second consecutive record on Tuesday, driven by investors who found little comfort in the pledges from European Union officials to contain the spread of the debt crisis across the single currency bloc.

Spot gold was down 0.2 percent on the day at $1,550.50 an ounce by 1355 GMT, having risen in each of the last six trading sessions, while gold in euros was up 0.3 percent, set for a third daily rise, at 1,109.60 euros an ounce, having hit a record 1,118.58 earlier.

COMEX August gold futures eased 0.4 percent to $1,542.50.

Copyright Reuters, 2011