The euro may face renewed pressure on the foreign exchange markets, as evidence grows of a widening rift between Europe's central bankers and politicians.

After falling to a record low on Friday, the euro rose marginally against the US dollar yesterday, although, as expected, forecasts in the UK media of intervention by the European Central Bank to support the currency proved unfounded.

The European Central Bank chief economist, Mr Otmar Issing, told journalists late yesterday that such intervention could often be counter-productive, producing the opposite effect to that intended. The markets are likely to interpret this as a strong signal that such intervention is not planned in the short term.

The euro was trading at $1.0437 late yesterday after plummeting to $1.0390 on Friday, with dealers saying the rise was prompted by "verbal" interventions from central bankers anxious to halt its decline.

Mr Aziz MacMahon, economist at Ulster Bank, said the euro received a temporary boost yesterday afternoon after Yugoslavia confirmed it would accept G8 principles on Yugoslavia.

However, he added, there was nothing really concrete enough about the proposals and it was not sufficient to turn around the generally gloomy market sentiment on the euro.

Worries about the US market also helped underpin the currency, according to Mr MacMahon. "What is stopping it sliding any further is uncertainty about the dollar and about adverse movements in the bonds or equity markets."

Demonstrating the tensions emerging between Europe's central bankers and politicians, last night Mr Issing warned that the single currency would remain weak until EU member-states pressed ahead with the necessary structural reforms.

The former Bundesbank council member said the euro would "only become stronger when the price stability we have at present is matched by the other elements which are needed to achieve higher growth, stronger employment increases and a decline in unemployment". In pre-publication extracts from an interview with the German weekly, Rheinischer Merkur, Mr Issing urged greater labour market flexibility and deregulation when "restrictions have so far made employment creation as good as impossible".

His comments, aimed especially at Germany, came amid growing fears that the continental economies will fail to stage a full recovery this year and could even be heading for a hard landing.

But Mr Werner Muller, the German economics minister, insisted that growth would exceed 2.5 per cent next year as exports expanded after slowing down in the first half of 1999 through recessions in Asia, Latin America and Russia.

He said the euro could rise as long as the 11 countries which adopted the single currency on January 1st observed strict budgetary disciplines.

"The euro will gain ground if national governments adhere to the deficit rules. We must also do what we can to boost growth so that Europe has firmer economic feet," he said in Bonn.

But Mr Issing said the recent decision by EU finance ministers to allow Italy to run a public sector deficit of 2.4 per cent, compared with the original 2 per cent target, was "not encouraging".

"The more-than-understandable negative public reaction and the fall in the external value of the euro should be enough of a warning," he said.

He reserved his fiercest criticism, however, for the German government's failure to reform a social security system "which it can no longer support in economic, social or financial terms" and which threatened to turn the country into the "sick man" of Europe.

"The question can no longer be whether the reforms which are needed are to come. The question is more whether the process can run in a controlled manner or whether it deteriorates into a crisis."

Meanwhile, the Belgian finance minister, Mr Jean-Jacques Viseur, said ECB intervention could be counter-productive. "A premature intervention would go against our first aim which is to ensure strong growth in an environment where there is no threat to price stability." With the ECB expected to hold rates at 2.5 per cent at its governing council meeting tomorrow, EU growth is likely to be barely 2 per cent this year and the euro will continue to falter.

The German government wants this week's EU summit in Cologne to back stability for the euro, officials said yesterday. EU leaders meet in the German city on Thursday and Friday for a summit that will round off Germany's six-month spell at the Union's helm and a senior member of Mr Schroder's party said they would issue a statement on the euro.

"A statement is planned for the Cologne EU summit concerning the stability of the euro," Mr Ottmar Schreiner, the Social Democrats' main business manager, told a news conference.