Debt worries hit euro, european shares lower

The euro hit a 3-1/2 year low against sterling and German bond prices extended last week's gains on Monday as investors worried the European Central Bank had changed its stance on how some bondholders could be treated under Spain's bank bailout.

However, markets were waiting for testimony from U.S. Federal Reserve Chairman Ben Bernanke later in the week for any hints of new stimulus to help the economy and this tempered price moves.

There are also signs China's monetary authorities may ease further to support the slowing economy were supporting oil and other commodities.

"Spanish and Italian speculation remains at the fore. To me sentiment still feels fragile... we're just waiting for the next development there," one fixed income trader said.

The ECB declined to comment on a report in the Wall Street Journal saying President Mario Draghi had advocated imposing losses on holders of senior bonds issued by the most severely damaged Spanish savings banks.

This would be a change to the ECB's previous stance and worried investors and could set a precedent for future bailout packages.

The euro fell 0.1 percent to 78.55 pence in early London trade, its lowest level since November 2008. Germany's 10-year bonds gained 1.5 basis points sending its yield down to 1.24 percent

German debt has been the investment of choice for investors seeking shelter as yields have risen on Spanish and Italian bonds as weak economic conditions threaten to overcome the effort to rein in their budget deficits.

European shares edged down on Monday after registering a sixth straight week of gains on Friday. The FTSE Eurofirst 300 index of top European shares was down 0.2 percent at 1040.50 points.