The euro dropped yesterday on ever deepening divisions in Europe over financial aid to debt-laden Greece ahead of a key European Union summit this week.

The market jitters came after European Commission chief José Manuel Barroso said that European "solidarity" with Greece would help stabilise the eurozone, in remarks to the Financial Times yesterday.

Germany, Europe's economic powerhouse, has fought off pressure to aid Greece, saying that rescuing Greece now would take away the incentive for the Greek government to enact reforms to cut its huge budget deficit.

German Foreign Minister Guido Westerwelle said Germany was "very reticent" to work on plans to help Greece, observing that such plans might not be necessary.

But Barroso voiced optimism on German support, saying: "I know Chancellor Merkel. She is a committed European and I have no doubts that she will, if needed, be in favour of providing financial assistance to Greece."

The euro fell to $1.3514 in morning deals in London from $1.3560 late on Monday, with analysts warning that the uncertainty over Greece in the run-up to the summit tomorrow and Friday would push it further down.

"The foreign exchange market looks set to remain on tenterhooks today," said Stuart Bennett, an analyst at French bank Credit Agricole CIB.

With "the rhetoric from German policymakers signalling they are digging their heels in with regard to Greece, the market is positioning for the worst."

Merkel said on Monday that there was "no question of an urgent decision in the European Council about aid for Greece," although France, Italy and Spain have all called for quick joint action by Europe fix to the Greek debt crisis.

"The French position is very clear," French Foreign Minister Bernard Kouchner said on Monday. "We cannot, we must not abandon our Greek friends."

Speaking after meetings in Brussels, Mr Kouchner added that "on this issue, we are not totally in agreement with our German friends."

Meanwhile, a senior US Federal Reserve official has warned that the Greek crisis could directly affect the US economy by hitting American exports because of lower eurozone growth as a result of adjustments to rescue Greece.

Atlanta Federal Reserve regional chief Dennis Lockhart also said that the crisis could lead to a broad shock for financial markets which "could play out in the banking system or in the form of a general retreat from sovereign debt."

Greek Prime Minister George Papandreou says his country faces the prospect of bankruptcy without some form of support, particularly to reduce the interest rate it is forced to pay to borrow money on international debt markets.

The yield (interest rate) on Greek government 10-year bonds rose to 6.446 per cent on Monday but had eased to 6.341 per cent by yesterday morning.

Greece has the highest deficit in the eurozone - estimated at 12.7 per cent of output in 2009 - and risks a financial crunch as it needs to raise some €20 billion for debt redemptions due by the end of May.