Sept. 29 (Bloomberg) -- The British pound fell the most against the dollar in 15 years and the euro weakened after European governments bailed out banks and investors lost confidence in the region's financial institutions.

The currencies also declined versus the Japanese yen after Belgium, the Netherlands and Luxembourg threw an 11.2 billion- euro ($16.3 billion) lifeline to Fortis, the largest Belgian financial-services firm, and the U.K. Treasury seized Bradford & Bingley Plc, the nation's biggest lender to landlords. The dollar rose the most in eight weeks against the euro after President George W. Bush and Congressional leaders agreed on a $700 billion plan to revive credit markets.

``We are seeing some very, very big moves with the pound and ones of a fairly chunky magnitude with euro-dollar as well,'' said Martin McMahon, a currency strategist in Zurich at Credit Suisse Group. ``It's now clear that there is not just a U.S. problem in the banking sector. There are problems in Europe and the concern is that it might just be the tip of iceberg.''

The British currency slid as much as 2.6 percent to $1.7959, from $1.8445 at the end of last week, the biggest intraday decline since Sept. 16, 1992. It was at $1.8040 as of 7:42 a.m. in New York, the lowest level since Sept. 19. The euro fell as much as 2.1 percent to $1.4302 and traded at $1.4361, from $1.4614. It weakened to 152.42 yen, from 154.94 yen at the end of last week.

The pound fell as Bradford & Bingley became the third major U.K. bank to run into trouble since global credit markets seized up last year. Northern Rock Plc was nationalized in February and HBOS Plc sold itself to Lloyds TSB Group Plc on Sept. 18.

Crisis Fallout

The euro weakened after the governments of Belgium, the Netherlands and Luxembourg bailed out Fortis to restore confidence in the company following a 35 percent drop in its share price last week. Fortis came under pressure because of speculation the bank would struggle to replenish capital depleted by the 24.2 billion-euro takeover of ABN Amro Holding NV units last year and credit writedowns.

The rescues underline how fallout from the crisis that drove Lehman Brothers Holdings Inc. into bankruptcy and prompted the U.S. government to prepare a $700 billion bailout package is spreading around the world. European governments have yet to produce a corresponding response to the crisis. The cost of borrowing in euros for three months rose to a record today.

``The bailout will clearly undermine investor confidence in the euro and euro-zone assets,'' Lee Hardman, a London-based currency strategist for Bank of Tokyo-Mitsubishi, wrote in a report. ``It appears that both U.K. and European authorities still remain reactive rather than proactive in their response to dealing with the financial crisis.''

`Dollar on Front Foot'

Hypo Real Estate, Germany's second-biggest commercial- property lender, also received a 35 billion-euro loan guarantee to fend of insolvency. Dexia SA fell as much as 33 percent in Brussels trading after Le Figaro said the company, the world's biggest lender to local governments, may soon announce a plan to raise capital in a bid to reassure markets.

``The growing negative events in the euro-zone are shifting the balance very swiftly to the dollar on the front foot,'' said Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp. in London. ``There are massive questions about how they are going to fund these nationalizations.''

European confidence in the economic outlook fell to the lowest since the slump in the wake of the Sept. 11 terrorist attacks. An index of executive and consumer sentiment dropped to 87.7 in September from 88.5 in August, the European Commission in Brussels said today. That is the lowest since the index fell to 86.6 in November 2001. Economists had forecast the indicator would drop to 87.3 this month, according to the median estimate of 33 economists surveyed by Bloomberg News.

ECB Rate Bets

Traders raised bets the ECB will lower borrowing costs to revive the 15-nation economy. The implied yield on the Euribor futures contract expiring in March fell 14 basis points to 4.51 percent today from 4.665 percent on Sept. 26. Policy makers will still keep the benchmark rate at 4.25 percent when they meet on Oct. 2, according to a Bloomberg News survey of 58 economists.

U.S. lawmakers reached agreement yesterday on the bank- bailout plan as House Republican leaders backed away from opposition to the proposal after it included plans to create insurance for mortgage-backed securities. The House and Senate are scheduled to vote on the bill early this week.

``We are now in a environment where the dollar should be well-supported,'' said Daragh Maher, deputy head of currency strategy in London at Calyon, the investment-banking arm of France's Credit Agricole SA. ``Last week, we had sufficient wobbles about whether the plan would be passed. As it looks to be introduced, it should play as a dollar positive.''

Implied volatility on one-month euro-dollar options rose to near an eight-year high of 15.1375 percent. On Sept. 18, it increased to 15.5525 percent, the same level that triggered the Group of Seven nations to buy euros in 2000 to halt the 27 percent slide from its 1999 debut.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net

Last Updated: September 29, 2008 07:50 EDT