The dollar rose sharply on Tuesday as fresh nerves over the outlook for a global economic recovery and more problems in the banking sector encouraged investors to turn once more to the safehaven US unit.

Dealers said the new-found aversion to risk pushed down global stockmarkets and was stoked by British plans for a major shake-up of its banking industry.

Meanwhile international monetary policy was in focus after Australia raised interest rates for a second month running and the US Federal Reserve prepared for its latest meeting.

The Australian move increased concerns that the authorities are moving towards reining in some of the massive stimulus measures implemented to combat the worst global slump in decades.

Investors are worried, however, that officials may begin withdrawing stimulus before the underlying economy is strong enough to stand on its own feet again, dealers said.

In late afternoon London deals, the European single currency was at 1.4657 dollars, off a one-month low of 1.4636 dollars earlier but down from 1.4772 dollars in New York on Monday.

Against the Japanese currency, the dollar slipped to 90.29 yen from 90.33 yen late on Monday. Tokyo markets were shut due to a public holiday in Japan.

- The euro has broken down through 1.4700 dollars and stocks are registering hefty losses as the market takes risk off the table in the wake of another run of bad news from the banking sector - said analyst Jane Foley at online trading firm Forex.

Britain on Tuesday said it would force state-rescued Royal Bank of Scotland and Lloyds to sell assets in a bid to revive the sector, injecting another 30 billion pounds (33 billion euros, 49 billion dollars) into them.

The government hopes to create new banks, promote competition and guarantee more lending to businesses and individuals as a result.

Dealers said the second Australian rate hike attracted attention after last month it became the first advanced economy to raise lending costs since the global financial meltdown, declaring the risk of a recession over.

The US Federal Reserve meanwhile is widely expected to hold its key lending rate steady in a range of zero to 0.25 percent on Wednesday while the European Central Bank and Bank of England will announce policy the following day.

Most expect no change in the level of interest rates but the markets will be looking closely to see what the central banks might have to say about the outlook and the prospect for tightening monetary policy.

In London late Tuesday, the euro was changing hands at 1.4657 dollars against 1.4772 dollars late on Monday, at 132.33 yen (133.44), 0.8946 pounds (0.9028) and 1.5106 Swiss francs (1.5094).

The dollar stood at 90.29 yen (90.33) and 1.0307 Swiss francs (1.0218).

The pound was at 1.6382 dollars (1.6404).

On the London Bullion Market, the price of gold was little changed at 1,061 dollars an ounce after 1,062 dollars late on Monday.