Selling gathered momentum amid worries about potential dollar sales by hedge funds and other financial institutions to stem losses from turmoil in emerging markets. Market concern about the impact on the financial sector heightened this week after news the Federal Reserve Bank of New York organised a bailout with a group of 15 major US and foreign banks to save Long-Term Capital Management (LTCM), a large US hedge fund hit by volatility in emerging markets.

"The LTCM news has added quite a lot of pressure on the dollar after it has already been weakening due to interest rate considerations and concern about unwinding of dollar/yen positions," said Andrew Milligan, economic adviser at CGU Investment Management in London.

In European trading the dollar fell to a low of 1.6620, its lowestsince April 1997 and down over eight percent from a high of 1.8135 in late August.

Milligan said the dollar's latest lurch lower against the mark was a function of expectations that US interest rates are heading lower, while rates in core European countries look set to remain steady. The dollar also weakened against the yen amid speculation that hard-pressed hedge funds may sell dollars to repay yen loans, traders said.

Many funds have taken advantage in the past few years of Japan's low interest rates by borrowing in yen, then converting them into higher-yielding securities elsewhere. These so-called yen carry trades have been partly responsible for the dollar's drop from an eight-year high 147.63 yen in August to a low of 133.37 on Friday as funds have unwound these trades to cover losses elsewhere.

"The yen carry trade was a major source of funding for hedge funds and that is coming to an end because they are in such dire straits that they're having to unwind a lot of positions," said Paul Gay, afund manager at UBK Asset Management in London.

Even though LTCM received a $3.5 billion bailout to cover losses of $4 billion, traders said it may sell dollars to pay back yen loans. Hedge fund activity also pushed the dollar to a 10-month low at $1.7072 against sterling amid talk that LTCM had a sterling/dollar exposure on an underlying corporate bond position. Unwinding of that position led to demand for pounds, dealers said.

Further losses in the Dow Jones Industrial Average after a tumble of nearly 2 percent on Thursday could lead to further losses for the dollar, dealers said. The Dow fell 152 points on Thursday, or 1.9 per cent, to 8,002 on Thursday, partly led by losses in shares of banks believed to have lent money to hedge funds.

"The dollar is under a lot of pressure because of the LTCM and the sell-off in the Dow," said Philippe Delmotte, a trader at BankBoston in London. "Further stock market losses are likely to hit the dollar even more." Speculation that the US Federal Reserve will act toshield the US economy from a global downturn in economic growth heightened on Wednesday after Chairman Alan Greenspan indicated action was needed to stabilise the effects of contagion from crises in emerging markets in Asia and Latin America.

In contrast, Bundesbank President Hans Tietmeyer said on Friday the German central bank would continue its "steady hand" policy on interest rates until it had sufficient information to justify a change. Investors were also unnerved by news that the House of Representatives Judiciary Committee will vote on October 5 or 6 whether to launch a formal impeachment inquiry based on independent counsel Ken Starr's report on President Bill Clinton's affair with a former White House intern.