The euro fell to a new, 16-month low against the U.S. dollar Friday amid grim economic news in Europe and as the dollar rallied on a positive surprise about American job creation.

The euro was trading down 0.53 per cent at $1.2721 late in the afternoon after falling as low as $1.2696 earlier in the day, its lowest point since Sept. 10, 2010.

The effective interest rate on Italy's 10-year bond rose above seven per cent again Friday, as Prime Minister Mario Monti met with French President Nicolas Sarkozy in Paris to discuss the spiralling debt crisis that threatens to engulf both of their economies.

That’s a level that has eventually forced other countries in the eurozone to seek bailouts. The problem is Europe cannot afford to rescue Italy as it has smaller economies.

Both leaders stepped up to reassure investors, vowing they saw eye-to-eye on how to resolve the crisis and promising coordinated action.

"Italy and France share a perfectly identical view on the future of Europe and the way to solve the crisis of confidence," Sarkozy told reporters after their meeting.

Monti, meanwhile, urged other countries to fulfill the promises they've made.

"In a situation so delicate for the EU and the eurozone, we agree ... that each member state has to do what's necessary in terms of budget cutting and reform," Monti said. "It is essential that all the member states work together on the same level."

The stakes are also high for the French leader, ahead of a presidential election in April.

French bond rating at risk

France, whose bond yields have also been rising steadily, though less dramatically than Italy's, faces the loss of its prized AAA credit rating. Any downgrade would have far-reaching consequences for Europe since Paris' credit rating is one of the bedrocks of the continent's bailout system.

Europe’s debt crisis, which began as a problem of over-borrowing in small, weaker countries, is now knocking at the door of core economies such as Italy and France.

It is pushing much of the region toward a new recession. Economic sentiment and retail sales are falling across the region, according to new data released Friday, while unemployment in the eurozone is stuck at 10.3 per cent, a 13-year high.

A contraction in their economies would undermine efforts by European governments to regain investors' confidence in their public finances.

French Finance Minister Francois Baroin said Friday that the first responsibility of Europe's leaders is to make good on promises to bring public debt and spending under control.

"We have to eliminate in the mind of the markets the existence of doubt on the question of unity in the eurozone," Baroin said."There cannot be any doubt."

Financial turmoil also grew on the fringes of the eurozone, in Hungary. On Friday, Fitch Ratings downgraded Hungary's credit grade to junk status, as Moody's and S&P had already done.

Earlier this week, Hungary was forced to pay 10 per cent to borrow 12-month money.

The wider spread between the 17-nation European currency and the greenback was also the result of a strengthening dollar, as the U.S. Labor Department reported that employers added 200,000 jobs in December and the unemployment rate fell to 8.5 percent, the lowest since February 2009.

That's a sign that the job market is slowly improving.

Canadian dollar lower

The dollar rallied against most other currencies Friday, including the Canadian dollar, which closed at 97.37 cents US, down three quarters of a cent.

European leaders pledged at a summit late last year to hand sweeping powers over to Brussels, giving bureaucrats the power to send back irresponsible national budgets for revision.

The routine violation in the past of European rules on overspending is partially responsible for over-indebtedness.

But Poland's finance minister warned Friday that such plans for closer ties among the countries that use the euro need democratic legitimacy before they can be put into place. Finance Minister Jacek Rostowski told a conference in Paris that tighter eurozone integration is necessary, but that before vast powers are handed over to the EU executive, European citizens must have a say.

"For something that far reaching as far as national sovereignty to be accepted then there would have to be some form of deep democratic legitimization," he said. "That would either require a co decision with European Parliament or a majority of national parliaments or something like that."

In the interest of calming financial markets — which can't wait for the kind of messy parliamentary votes and national referendums that have dogged the EU in the past — leaders pledged to sign up to tighter integration at the summit.

But many question whether such sweeping powers can be handed over without some kind of consultation with European citizens.

Rostowski also bemoaned that Britain didn't sign up to the new treaty proposed at the summit. All other EU countries did, though some have since expressed reservations.

"It would be catastrophic for the whole of Europe if the further integration of the eurozone, which we fully support, were to lead to division," he said.

With files from The Associated Press