The euro hit a four-year low on Monday on fears that austerity measures would stifle recovery, as European finance ministers prepared to discuss tighter regulation a week after launching a $1 trillion rescue plan.

German Chancellor Angela Merkel said on Sunday the rescue package had only bought the euro zone time to tackle its basic problem -- a yawning gap between its strongest and weakest economies.

The euro slumped to a four-year low on Monday on Asian markets after Friday's sell-off in the West, falling to its lowest since April 2006 on $1.2234, while investors sought safety in gold.

It's the safe-haven thing. Gold doesn't earn you any interest or dividends, but who cares? ... The euro zone is a house of cards, a Europe-based gold trader said.

But a Governing Council member of the European Central Bank, Ewald Nowotny, said the euro was trading in a normal range and there was no reason for hysteria.

Bank shares in Greece, whose debt crisis prompted the rescue package aimed at stopping a spread to other vulnerable euro zone members and even destabilizing the global economy, tumbled four percent on Monday.

Greek Prime Minister George Papandreou was quoted on Monday as saying that he had written a letter to U.S. President Barack Obama jointly with Germany's Merkel, French President Nicolas Sarkozy and Eurogroup chairman Jean-Claude Juncker on whether the market in credit default swaps should be closed.

In an interview with Germany's Handelsblatt newspaper, Papandreou criticised financial markets for overreacting to Greek's debt crisis and accused speculators of helping to provoke panic reactions.

Angela Merkel, Nicolas Sarkozy, Jean-Claude Juncker and I have suggested in a joint letter to Barack Obama whether the markets for credit default swaps ... should not be closed. The G20 countries want to discuss this, he said.

Politicians have long called for tighter control of speculators, who they believe exacerbated Greece's borrowing problems by snapping up insurance that it could default.

But Papandreou's call to consider closing the market for this insurance, known as credit default swaps, appeared to go further than anything demanded so far and would probably meet stiff opposition from companies and other bond buyers who depend on it to cover their risk.

CONTROLS ON HEDGE FUNDS

Papandreou's remarks come ahead of the meeting of European finance ministers in Brussels that is set to sign off tougher controls for hedge funds and private equity.

Britain has long sought to water down these rules although it is now possible that countries such as Germany and France will overrule London in a vote, forcing it to accept a stricter regime.

British finance minister George Osborne said on Monday the new coalition government would next Monday outline six billion pounds ($8.75 billion) of spending cuts this year ahead of its first budget on June 22.

Deficit reduction and continuing to ensure the economic recovery is the most urgent issue facing Britain, Osborne told reporters. We understand that and we need to get moving.

Britain's budget deficit is running at close to 12 percent of GDP, a similar level to that of crisis-hit Greece, and the new government has said bringing it down is a priority to avoid another economic crisis.

In her speech on Sunday, Merkel backed the huge European Union rescue package. Until recently reluctant to back bailouts for Greece and other nations, she said far more was needed.

We've done no more than buy time for ourselves to clear up the differences in competitiveness and in budget deficits of individual euro zone countries, she said. If we simply ignore this problem we won't be able to calm down this situation.

In the past week we have experienced ... how there has been speculation against the euro, our currency, she told the German Federation of Trades Unions. This calls for more regulation.

(Additional reporting by John O'Donnell; Writing by Charles Dick; Editing by Dominic Evans)

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