The eurozone's debt crisis deepened on Tuesday as investors pushed the risk premiums on Spanish and Italian bonds to euro lifetime highs and Portugal warned of the risks facing its banks.

The euro dipped to its lowest level against the dollar in over two months, immune to new attempts by European policymakers to calm markets hell-bent on testing the EU's determination to shield its financially weak members.

Two days after the bloc approved an 85 billion euro (US$111.7 billion) emergency aid package for Ireland, worries about Portugal and Spain persisted and the borrowing costs of countries like Italy, Belgium and France shot higher.

Markets are already discounting an eventual rescue of Portugal although, as Ireland did, it says it requires no outside help.

Should its much larger neighbor Spain require assistance, it would sorely test the resources of the bloc and raise questions about the integrity of the 12-year old single currency area.

"Markets are very nervous and may even target situations that do not warrant such excessive worrying, hence no one can really predict," Tomasso Padoa-Schioppa, a former Italian finance minister and ECB member, told a Greek newspaper when asked whether the EU would be able to save Spain.

"In my opinion, conditions in Spain are such that there is absolutely no reason to expect that it will be targeted. I repeat, however, that markets are in a very nervous mood."

Italy, which most analysts see as at lesser risk, is now being referred to as "too big to fail" and "too big to bail."

The euro dipped below US$1.30 for the first time since mid-September and the yield spreads of 10-year Spanish, Italian

and Belgian bonds over German benchmarks spiked to their highest levels since the birth of the euro in January 1999.

The cost of insuring most eurozone government debt against default rose and European shares banking shares fell over 1% in nervous trading.

"INTOLERABLE RISK"

Portugal's central bank warned overnight that its country's banks faced an "intolerable risk" if the government in Lisbon failed to consolidate public finances and urged financial institutions to reinforce their capital in the coming years.

Although the minority Socialist government in Portugal approved an austerity budget for 2011 last week, it is struggling to meet its targets for deficit reduction, with the core state sector shortfall widening 1.8% in the first 10 months of this year.

Troubles in Portugal could spread quickly to Spain because of their close economic ties.

The German economy has been robust this year on the back of rising exports and surprisingly strong domestic demand, but countries like Greece, Ireland, Portugal and Spain face little or no growth and high unemployment.

Ireland faces a particularly daunting task in meeting the terms of its bailout and cleaning up its battered banks. Irish bank debt spreads continued to widen on Tuesday despite the rescue.

In addition to the bailout, European leaders approved on Sunday the outlines of a long-term European Stability Mechanism (ESM), based on a Franco-German proposal, that will create a permanent bailout facility and make the private sector gradually share the burden of any future default.

The new mechanism could make private bondholders share the cost of restructuring a euro zone country's debt issued after mid-2013 on a case-by-case basis.

Eurointelligence, an online commentary service, said markets were growing increasingly concerned about the solvency of euro zone peripheral states after focusing mainly on their immediate liquidity problems in past weeks.

Reflecting EU concerns about Greece's ability to pay back the loans in a 110 billion euro EU/IMF bailout agreed back in May, it was given a six-year repayment extension to 2021 at the price of a higher rate of interest.