LONDON - Fears of a European recession hammered the euro and the British pound on Wednesday as traders bet on further interest rate cuts in the region to try to stave off a prolonged downturn.

The euro fell to the lowest level for almost two years against the dollar, while the British pound plunged to a five-year trough after Bank of England governor Mervyn King warned that Britain was likely entering a recession.

Dealers said the currencies were being pressured by speculation that European central banks will slash interest rates to promote economic growth in the face of the worst financial crisis in decades.

Against the Japanese currency on Wednesday, the dollar fell to 99.24 yen from 100.31 yen late in New York on Tuesday. "Players are still trying to test how much lower the euro can go after it broke through the 1.3 line so easily," said Yosuke Hosokawa, head of forex at Chuo Mitsui Trust Bank.

The dollar slid below the key 100-yen level as falling stock markets prompted renewed risk aversion among investors. The euro meanwhile sank as low as 128.10 yen, which was last seen April 2004.

"While the global trend is for interest rate cuts, Japanese rates are likely to stay on hold," added Hosokawa.

Major world central banks slashed interest rates in early October in a concerted effort to calm market turmoil. But the Bank of Japan did not participate, saying its benchmark rate was already low enough at 0.5 percent.

"Interest rate differentials between the yen and other currencies are narrowing," said Saburo Matsumoto, strategist at Sumitomo Trust Bank.

"Since concerns about an economic slowdown are growing, particularly in Europe, the yen-buying trend is expected to continue for now," he said. Meanwhile, sterling sank to 1.6203 against the dollar shortly before 0600 GMT, which was its lowest level against the greenback since September 19, 2003.

The pound also fell below 162 yen to levels not seen in eight years. "Market players are now focused on interest rates, not stock prices, as a yardstick for deciding whether to sell the euro and the pound," Minoru Shioiri, a manager at Mitsubishi UFJ Securities, told Dow Jones Newswires. "With the economy and interest rate outlook being as it is in Europe, there is no way to buy the euro."

In Budapest,  where the forint had plunged to a near two-year low point against the euro, having lost 4.0 per cent on Tuesday, the central bank jacked up its key rate by three points to 11.5 percent.

Immediately after the announcement, the forint-euro rate firmed to 272 forint to the euro but then dropped back to around 276 forint.

In London morning trading on Wednesday, the euro changed hands at 1.2897 dollars against 1.3073 late Tuesday, at 128.10 yen (131.14), 0.7866 pounds (0.7815) and 1.5021 Swiss francs (1.5050).

The dollar stood at 99.24 yen (100.31) and 1.1638 Swiss francs (1.1511). The pound was at 1.6394 dollars (1.6728). On the London Bullion Market, the price of gold fell to 757.63 dollars an ounce from 772 dollars late on Tuesday.