The rupee fell to a new three-and-a-half-month low against the US dollar on Tuesday despite a recovery in the domestic stocks, as renewed concerns about the eurozone debt crisis dampened investors' enthusiasm for risky assets.

The rupee settled at 52.70 per dollar after being as low as 52.87 and as high as 52.60. It had opened at 52.68 as against the previous close of 52.5250.

The rupee fell to the lowest level since January on concern that political changes in Europe will slow efforts to contain the region’s long-running debt crisis.

India’s benchmark 10-year bond yields traded near a two-week high on speculation that record government debt sales this year will reduce demand for the securities.

The Government may raise fuel prices this quarter, a finance ministry official was quoted as saying, raising concern that inflation will accelerate.

The yield on the 8.79% notes due in November 2021 was 8.57% in Mumbai, compared with 8.58% yesterday, according to the RBI's trading system. Earlier, it touched 8.61%, the highest level since April 9.

Meanwhile, political uncertainty in the euro zone sent US and European stocks lower on Monday after failed budget talks resulted in the collapse of the Dutch government, stoking fresh fears about Europe’s debt problems.

The Dutch Prime Minister's resignation prompted new elections, after one of his coalition partners in the government withdrew due to negotiations over the 2013 budget.

A disappointing first round for French president Nicolas Sarkozy stoked concerns that existing euro zone treaties designed to address the debt crisis could be dismantled by Socialist leader François Hollande if he comes to power.

Sarkozy, one of the architects of the EU agreement on austerity measures aimed at controlling the sovereign debt crisis, lost the first round of elections and will face Hollande in a May 6 runoff.

Disappointing data on a key manufacturing index out of China and eurozone also weighed on the sentiment.

In the global markets, the euro halted its biggest drop in two weeks against the yen as debt sales by the Netherlands and Spain eased concerns about regional efforts to contain the three-year-old debt crisis.

The pound reached an almost six-month high against the dollar amid speculation that the Bank of England will pause its asset purchases.

Australia’s dollar weakened and government bond yields sank to record lows after data showed that consumer price inflation slowed in the first quarter, providing the nation’s central bank with ample scope to lower borrowing costs.

The yen gained today against all major rival currencies amid growing risk aversion. Japan’s currency rose against the dollar and euro before Dutch Prime Minister Mark Rutte is set to speak in parliament today, less than 24 hours after tendering his Cabinet’s resignation.

Rutte offered to quit after budget talks with Geert Wilders’s Freedom Party collapsed.

The yen is down 7.5% this year, the worst performance among the 10 developed-nation currencies.

In the US, the Federal Open Market Committee (FOMC) begins a two-day meeting today. The American central bank is scheduled to release a statement on monetary policy along with its projections for growth, unemployment and inflation tomorrow.