The euro hit a session low of $1.3711 after an article in the ECB's monthly report said forcing private bondholders to accept losses on euro zone sovereign debt could damage the euro's reputation, prompting traders to take profits on the euro's short-covering rally.
The euro had rallied earlier in the week, climbing to $1.3834 on Wednesday after German Chancellor Angela Merkel and French President Nicolas Sarkozy late last week said they would announce a plan to solve the euro zone debt crisis by the end of the month.
Their statement had prompted investors to pare back bets for more euro losses, but Thursday's selling suggested investors are cautious about pushing the euro higher given the barriers policymakers face to finding a lasting debt solution.
"We've come a long way in a fairly short period time, so we're seeing a squeeze to the downside. All the structural negatives for the euro are still there," said Geoff Kendrick, currency strategist at Nomura.
He added that the euro's downside remained intact, adding: "I'd be a seller if we rise above $1.40. I wouldn't be surprised to see $1.33 before we get a Greek bailout."
Traders said selling by Russian names and European corporates dragged the euro down from a session high of $1.3827 touched in early European trade.
The move highlighted wariness among investors to bet on more gains unless euro zone authorities unveil a convincing strategy to fight the debt crisis at a summit on Oct. 23.
"Unless we really break through the $1.37-1.38 area, it might be tough to build euro long positions up here," said Jeremy Stretch, currency strategist at CIBC.
He said the summit was key to whether the euro would extend its gains. Investors will need to be convinced that officials have a unified, lasting solution to help debt-ridden countries including Greece, while limiting the impact elsewhere.
"We need to see recognition that France and Germany are on the same page, and the recognition that officials are looking for a pan-European solution, rather than national ones. Also, the rescue fund has to be large enough to be able cope with the scale of the problem," Stretch said.
Other analysts said the euro was vulnerable to more selling if investors believe officials are doing too little too late to bolster European banks, which are expected suffer if they are forced to accept haircuts on their Greek debt holdings.
The euro fell 1 percent to 105.36 yen, retreating sharply from a one-month high near 107.03 yen hit the previous day.
EURO RESISTANCE
The euro has climbed 2.5 percent versus the dollar this week, but technical analysts said its upside was limited after its rally stopped short of technical resistance around $1.3848, the 50 percent retracement of its late August to early October slide.
Above that, further resistance lies at $1.3937, which corresponds to a couple of daily highs hit in September.
Selling in the euro and other currencies perceived to be higher risk boosted the dollar index 0.4 percent to 77.30, pushing it above initial technical resistance at 77.11, the index's 38.2 percent retracement of its May-October rally.
The Australian dollar slipped 0.2 percent to US$1.0132, as currencies believed to be higher risk sold off alongside the euro.
The Aussie retreated from a three-week high of $1.0235 hit after data showed Australian employment rose by a surprisingly strong 20,400 in September, the biggest increase in seven months.
Despite its gains versus the euro and other currencies, the dollar fell 0.6 percent to 76.73 yen as the Japanese currency gained across the board. The dollar had hit a one-month high around 77.48 yen on Wednesday.
Traders said yen buying by Japanese exporters weighed on dollar/yen and cross/yen.