The euro fell to its lowest level against the dollar since March 2015 after Italian Prime Minister Matteo Renzi said he would resign on Monday following a crushing defeat on constitutional reform.
Investors fear Mr Renzi’s defeat could cause political instability and renewed turmoil for Italy's banks, pushing the euro zone towards a fresh crisis.
The single currency slid the most since the aftermath of the Brexit referendum. The euro fell 1.3 per cent to $1.0524 just after midnight in Rome, the most since June 24. It earlier touched $1.0506, the lowest since March 2015.
Against the pound, the common currency slipped 0.76 per cent with one euro buying 83p.
However the currency rebounded from that low to stand at $1.0634, a fall of just 0.3 per cent.
Analysts at RBC Capital Markets said the risk of a Eurozone crisis could see the euro trade as low as $0.8000.
“It may sound extreme, but if a second euro zone crisis were to hit, with the US dollar at a much stronger starting point, the euro could arguably trade lower still,” analysts said.
Kathleen Brooks, research director at City Index Direct, said investors were cautious but there was no panic.
"While the markets are likely to remain nervous as we start a new week, they haven't fallen off a cliff, so far," Ms. Brooks said.
"Either markets are becoming immune to political risk, or they are taking the view that the Italian issue will be a slow-burner, even if the president can't form a government, he still has 70 days to try, and that seems quite far away at this stage," she added.
Mr Renzi’s failure deals a fresh blow to the EU already under pressure after the UK’s shock vote to leave the EU in June.
"It's not very hard to see a new election on the horizon, and it's not very hard to see the (opposition) 5-Star Movement taking power with stated aims to either leave the EU, drop the euro, or both," said Mark Wills, head of State Street Global Advisors' investment solutions group for the Asia Pacific.
"For Italy, establishing stable governance and a plan to guide the nation is of critical importance given the fragility of the economy, challenging policies and the liquidity problems in the banking system," he added.
