(Reuters) - A "disastrous" German bond sale on Wednesday sparked fears that Europe's debt crisis was even starting to threaten Berlin, with the leaders of the euro zone's two biggest economies still firmly at odds over a longer-term structural solution.

Disastrous bond sale shakes confidence in Germany | Reuters



 Investors were also unnerved by reports that Belgium is leaning on Franceto pay more into emergency support for failed lender Dexia under a 90-billion-euro ($120 billion) rescue deal that had appeared done and dusted.

A special report by Fitch Ratings suggested France had limited room left to absorb shocks to its finances like a new downturn in growth or support for banks without endangering its cherished AAA credit status.

After one of the least successful debt sales by Europe's powerhouse economy since the launch of the single currency, the euro fell to 1.336 to the dollar and European shares sank to 7-week lows.

"The debt crisis is burrowing ever deeper, like a worm, and is now reaching Germany," one of the more eurosceptic backbenchers in Angela Merkel's center-right government, Frank Schaeffler of the Free Democrats (FDP) who are the junior coalition partners, told Reuters.

The German debt agency was forced to retain almost half of a sale of 6 billion euros due to a shortage of bids by investors. The result pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.

"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.

The new bond promised to pay out a 2.0 percent interest rate -- the lowest ever on an issue of German 10-year Bunds. The auction's average yield was 1.98 percent, down from 2.09 percent for the previous benchmark in October.

Ten-year Bund yields were last up 12 basis points to 2.039 percent versus 1.946 percent for U.S. T-notes.

GERMAN EXPOSURE

Finance Minister Wolfgang Schaeuble's spokesman told a news conference that the auction did not mean the government has refinancing problems and few on financial markets disagreed.

But it was a sign that as the bloc's paymaster Germany may slowly be pressured if the crisis continues to deepen. One senior ratings agency official said it could give Berlin cause to re-examine its refusal to embrace a broader solution.

"It's quite telling that there has been upward pressure on yields in Germany - it might begin to change perceptions," David Beers of Standard & Poor's told a conference in Dublin.

The borrowing costs of almost all euro zone states, even those previously seen as safe such as France, Austria and the Netherlands, spiked in the last two weeks as panicky investors dumped paper no longer seen as risk-free.

"Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries," said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.

The crux of an acceleration of the crisis in the past month is Italian bond yields' jump to levels around 7 percent widely seen as unbearable in the long term, despite intervention by the European Central Bank to buy limited quantities.