The euro slid and European stock markets dived Monday as investors judged that last week's pact to bind EU economies closer together would fail to quell its financial crisis.

The sell-off brought the European Central Bank into the market early to limit rises in Italian bond yields, which also had a knock-on effect on Spanish debt, pushing up demand for safe-haven German bonds.

Crucially for markets, the summit failed to break the deadlock over the more decisive involvement of the ECB that analysts say is needed to end the crisis.

Investors are also worried that the plans agreed Friday commit much of Europe to years of crippling budget cuts that will hamper growth and potentially derail the overall effort to put public finances back on track.

Yes, we have a plan in place to tackle the longer term problems but...it doesn't tackle the shorter term problems, said Peter Dixon, economist at Commerzbank.

The single currency hit a session low of $1.3261 after triggering stops below Friday's trough of $1.3280, and was down around 0.8 percent on the day. It is now about 6 percent below its October peak and 10 percent off its 2011 high of just under $1.50, struck in early May.

There is a deflated feeling for the euro this morning after the EU summit. People were looking for a greater response and more importantly the ECB refused to significantly step up their bond buying, said Beat Siegenthaler, currency strategist at UBS.

World stocks as measured by MSCI world equity index <.MIWD00000PUS> were down 0.26 percent on the day and are off over two percent for the past month. The key European index, the FTSEurofirst 300 index <.FTEU3>, was down nearly 0.7 percent on the day.

However, euro zone bank-to-bank lending rates have fallen to the lowest level since May as money markets continued to react to last week's cut in ECB interest rates and its decision to start providing banks with 3-year liquidity.

AUSTERITY FEARS

At the center of analysts' criticism of the EU deal are doubts that it will make its fiscal rules any more enforceable in practice than they have been in the past.

In the short-term the biggest worry for many is that most of the economies in trouble do not look capable of generating enough growth to pay off their debts - and budget cutbacks will just make that calculus worse.

In and of itself these proposals aren't fiscal union at all. They just really institutionalize the asymmetric adjustment that's been occurring in the euro zone already with the peripheral countries making all of the adjustment, (and) the core countries making none of it, said Megan Greene, senior economist at Roubini Global Economics.

And it just means that as the peripheral countries continue to implement harsh austerity measures, it will undermine GDP growth. So we won't see growth in the euro zone for a few years as long as this is the case.

German bund futures were about 70 ticks higher at 136.35, after opening lower. German 10-year yields were 7.7 basis points down at 2.025 percent.

However, 10-year Italian government bond yields jumped 32 basis points to 6.7 percent.

Moody's Investors Service said it would revisit the ratings of European nations in the first quarter of 2012, after last week's summit failed to produce decisive initiatives and left the euro area prone to further shocks.

The absence of measures to stabilize credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area under continued threat, it said in a report.

The chief economist of fellow agency Standard and Poor's in Europe said there would be need to be more summits and that time was running out.

Time is running out and action is needed on both sides of the equation, on the fiscal and monetary side, Jean-Michel Six told a business conference in Tel Aviv.

(Additional reporting by Neal Armstrong)

Gdp Commerzbank European central bank European union