The euro was down to $1.3638 in Tokyo morning trade from $1.3679 in New York late Monday. The European common currency also retreated to 104.42 yen from 104.89 yen.

The dollar was rangebound at 76.56 yen against 76.59 yen.

The euro dropped to around $1.36 in early Asian trade following news that S&P on Monday downgraded Italy's sovereign debt rating, citing economic, fiscal and political weaknesses in the eurozone's third-largest economy.

The news reduced risk appetite, prompting a sell-off on Asian stock markets.

S&P said it was lowering the rating by one notch to A, which is five steps above junk territory, because of "Italy's weakening economic growth prospects".

"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P said in a statement.

"The picture in Europe, full stop, is not getting any better. They can patch up any way they want the Greek situation but the problem is going to persist," HiFX senior trader Stuart Ive in Auckland told Dow Jones Newswires.

"If it doesn't persist in Greece, it will persist in Portugal or Ireland, or Italy or Spain," Ive said.

"The euro is falling on the news. But given it's supported above Monday's low in New York, the rating action has been somewhat priced in by the market," said Dai Sato, senior vice president at Mizuho Corporate Bank.

The news gave additional fuel to concerns over Greece's possible default and its contagion in the eurozone after a weekend meeting of eurozone finance ministers failed to make major progress.

Greece was to continue talks with the IMF and EU on Tuesday after being warned to tighten austerity measures and ramp up state asset sales to secure rescue funds and stave off bankruptcy early next month.

Greek Finance Minister Evangelos Venizelos held a conference call late on Monday with the heads of mission from the EU, IMF and European Central Bank to hammer out a response to slippage from agreed budget targets.

The finance ministry said in a statement "a productive and substantive discussion" took place and another conference call was scheduled to be held Tuesday.

Greece is under pressure from its international creditors to implement further austerity measures in order to gain the next slice of funding under a first 110-billion-euro ($150 billion) rescue plan unveiled last year.

Copyright AFP (Agence France-Presse), 2011