The euro recovered slightly against the dollar yesterday following rumours that central banks had intervened to prop up the currency. The euro moved from its record low of $0.8870 to $0.8990 and stabilised yesterday evening at around 89 cents.

The currency also improved against sterling after the Bank of England opted not to increase interest rates, ending the day just above 58p, compared with a little over 57p on Wednesday. Sterling also tumbled to its lowest level against the dollar in three and a half years.

A single small transaction yesterday morning by a central bank - possibly the Bundesbank - prompted traders to buy back euros in expectation of a large-scale intervention orchestrated by the European Central Bank (ECB). The ECB, the Bundesbank, the Bank of England and Italy's central bank all declined to comment on the rumours and by yesterday evening, most analysts were convinced that the transaction was commercial rather than the start of intervention.

"Now that the euro keeps getting weaker, the market takes careful note of what the central banks are doing. Every rumour of intervention will elicit this sharp reaction," said one currency analyst.

Most analysts expect the euro to remain under pressure in the short term but they predict that the currency will regain parity with the dollar. Mr Bernhard Pfaff, an economist at Commerzbank, believes that expected increases in US interest rates will depress the value of the dollar and the euro will make a steady return to health.

"In one month, the euro will be at 90 cents, in three months at 94 cents and in six months at 96 cents. In 12 months we'll be at $1.08," he said.

French Prime Minister Mr Lionel Jospin yesterday broke ranks with his European colleagues by calling for concerted action between the US, Europe and Japan to halt the euro's decline. Speaking in Budapest, he said the current strength of the dollar was primarily due to the psychology of financial markets that are ignoring Europe's healthy economy.

"A collective response from the large monetary blocs should be considered," he said.

Although the ECB can intervene unilaterally in the markets, concerted action would have to be agreed by European, US and Japanese finance ministers. When finance ministers from the Group of Seven (G7) leading economies met in Washington last month, they called for exchange rates to reflect economic fundamentals but the appeal went unheeded by the markets. The G7 meets again in Japan in late July but a German government spokesman said this week the euro was not on the agenda.

Bavarian Prime Minister Mr Edmund Stoiber warned yesterday that the euro will sink even further if Greece is allowed to join the currency union. The European Commission said on Wednesday that Greece was ready to join next January but the ECB expressed doubts about whether Athens had fully met the economic criteria for entry.

Mr Stoiber said that allowing Greece to join would send "the wrong signal" about the euro.