"Japanese investors were rumoured to be active sellers for Thursday, but overseas speculators were also looking for chances to drive down the euro," a Japanese trust bank trader said.

The euro later recovered somewhat against the yen to end the Tokyo session at around 106.57, propped up by speculation that the European Central Bank could come to its rescue.But dealers said the struggling euro looked set to surrender more ground.

"The euro will be under pressure until the European Central Bank actually intervenes to stop the downtrend, but until that, the market will likely remain eager about testing the euro below parity in the near term," one trader said.

The euro has come under attack on two fronts - a belief Europe's economic reforms are moving too slowly and an emerging view that Japan looks set for a healthy rebound.

"Itappears that the market is overly pessimistic about the economic outlook in the euro zone. The market is very keen to react to negative news on the euro, but intervention worries are also growing, both in euro/yen and dollar/yen," a Japanese commercial bank dealer said. The euro has lost about 21 per cent against the yen since its launch on January 4.

Late in a tense session in Tokyo on Thursday the European currency was at $1.0195, against $1.0280 on Wednesday. Fears of intervention by the Bank of Japan to buy dollars against the strong yen also limited aggressive follow-up sales in the euro against the yen, the dealers said. In thin trading ahead of the US thanksgiving day holiday, the US currency climbed to a morning high of around 105 yen where it met with resistance that eventually drove it back to 104.48/55 by late in the Tokyo session. Japan's vice finance minister for international affairs Haruhiko Kuroda warned that the euro was now "too weak" and should snap back and rise against the yen.

When asked his opinion of the euro's recent downtrend, Kuroda told reporters: "The euro is too weak. It (the euro) is undervalued right now, and it should rise against the yen and the dollar in the future."

Traders said some Japanese banks and life insurers were rumoured to be looking to sell European assets given rapid falls of the euro and bond prices. Pessimism towards European assets gathered steam following are port that US-German auto giant DaimlerChrysler AG would rather take a stake in Japan's Honda Motor Co than in Fiat SpA of Italy or PSA Peugeot Citroen of France.