* Worries growing that Spain needs external help
* Euro falls to near two-year low vs dollar, then recovers
* Irish 'yes' vote could provide very brief reprieve
* But trend remains for further falls in the euro
LONDON, May 31 (Reuters) - Expectations of an Irish vote in favour of Europe's fiscal pact helped the euro recover from a near two-year low against the dollar on Thursday, though any gains were seen limited as concerns grow that Spain may need to seek outside aid.
Opinion polls pointed to a 'Yes' vote in Ireland's referendum, which analysts said could prompt investors to cut some of their hefty bearish bets on the euro.
The euro fell as low as $1.2358, a level last seen in mid-2010, before recovering to trade up 0.3 percent at $1.2410. Any gains were expected to be short-lived, however.
The common currency was poised for its biggest monthly fall in at least eight, with some analysts expecting it to drop towards $1.20 in coming weeks as the euro zone's debt crisis deepens.
"We could see a very brief pause in the downtrend in the euro because of the Irish referendum, but beyond that the news is fairly negative," said Ian Stannard, head of European currency strategy at Morgan Stanley.
"There is very little on the horizon to provide sustained support and the trend is clearly downwards."
Morgan Stanley forecast the euro would fall to $1.15 early in 2013, though this assumes Greece stays in the euro, he said.
Spanish government bond yields held near euro-era highs and yields on safe-haven German bonds stayed close to record lows.
"Things are starting to look ugly. It seems like the market is making Spain its next target after Greece," said Teppei Ino, currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.
The European Commission on Wednesday offered Spain more time to reduce its budget and direct aid to recapitalise distressed banks, but the news had limited impact on financial markets.
Member states must decide whether to adopt these proposals and EU paymaster Germany has opposed any collective European banking resolution and guarantee system.
Speaking on Thursday, European Central Bank President Mario Draghi said the ECB could not "fill the vacuum" left by a lack of action on the part of national governments on fiscal growth.
Against the yen, the euro was at 97.83 yen, having dropped to its lowest in more than four months at 97.352 yen. This brought it close to an 11-year low of 97.04 yen hit in January.
FLIGHT TO SAFETY
Market players remained nervous as Greek polls showed parties for and against a bailout were neck-and-neck ahead of the country's second election on June 17.
With investors trying to escape the euro zone into liquid assets, the dollar's index against a basket of currencies hit a 20-month high of 83.11. It was last at 82.883 and looked set to close above its 100-month average, at 81.824, for the first time in almost 10 years.
A break of the 100-month average has been a good indicator of a long-term trend change, having produced four successful signals in the past 30 years.
The dollar fell to as low as 78.71 yen, the lowest in 3-1/2 months, as investors favoured the yen.
A fall in U.S. bond yields also helped to push down the dollar against the yen, as the currency pair is known to have a strong correlation with the yield gap between the two countries.
The dollar has crucial support for now from its 200-day moving average at 78.63 yen.
FOREX-Euro heads for biggest drop in 8 mths on pains in Spain - Reuters
* Worries growing that Spain needs external help
* Euro/yen edges nears 11-year low hit in January
* Dollar/yen hits 3-1/2 month low, Aussie/yen at 6-mth low
* US bond yield at 60-yr low, undermining dlr/yen
TOKYO, May 31 (Reuters) - The euro was poised for its biggest drop in at least eight months as the increasing likelihood of Spain needing outside assistance to fix its public finance and banking system led to a major escalation in the perennial crisis in the currency bloc.
Spanish government bond yields surged to a six-month high while German bond yields fell to record lows, pushing the spread between the two to a new high and adding stress to markets already frayed by anxiety that Greece may leave the euro zone.
"Things are starting to look ugly. It seems like the market is making Spain its next target after Greece," said Teppei Ino, currency analyst at Bank of Tokyo-Mitsubishi UFJ.
The euro fell to as low as $1.2358, a level last seen in mid-2010, when it had bottomed at $1.1876. It last stood at $1.2388, having dropped 6.4 percent this month, the biggest since September.
Against the yen, the common currency fell as low as 97.352 yen, edging near an 11-year low of 97.04 yen hit in January, with many traders now considering a break of that low as highly likely.
The euro's fall was driven by concerns that Spain, with an economy bigger than that of Greece, Portugal and Ireland combined, will probably need assistance as its fragile economy and ailing banking sector make it impossible to cut its deficit.
So far, though, Madrid has ruled out seeking Europe's help for its banks, while EU paymaster Germany has firmly opposed any collective European banking resolution and guarantee system.
"There are a huge amount of flight-to-quality moves right now. Only a policy coordination in Europe can stop this but markets can't find it now," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
"Until we see that, people will do trades that will minimise losses rather than make profits," Sera added.
PREPARE FOR WORST
Spain is by no means the only concern for investors, with markets rattled by Greek polls showing parties for and against a bailout are neck-and-neck ahead of the country's second election on June 17.
Italian debt yield also rose above 6 percent for the first time since May, while traders also warily look at whether the Irish will support Europe's new fiscal treaty as expected in a referendum on Thursday.
With investors trying to escape the euro zone and to hoard liquid assets, the dollar's index against a basket of currencies rose to 20-month high of 83.11. It looks set to end above its 100-month average for the first time in almost ten years.
In the past, a break of the 100-month average has been a good indicator of a long-term trend change, having produced four successful signals in the past 30 years.
"Everyone, from banks to companies, is now trying to prepare themselves to make sure they can get funding when they need money," said Hideki Amikura, forex manager at Nomura Trust Bank.
"Wherever you look, you can't find reason to expect a reversal in this. I cannot help thinking that the euro will fall below $1.20."
The dollar fell to as low as 78.71 yen, the lowest in 3-1/2 months, as investors favoured the yen, the currency of the world's largest creditor nation despite its mountain of public debt.
A fall in U.S. bond yields also helped to push down the dollar against the yen, as the currency pair is known to have a strong correlation with the yield gap between the two countries.
The 10-year U.S. bond yield fell below 1.6 percent , not seen at least for six decades and cutting the yield advantage over JGBs to near the lowest level in recent decades.
The dollar has crucial support for now from its 200-day moving average at 78.63 yen.
The Australian dollar fell 0.3 percent to a six-month low of $0.9673, after having fallen 1.3 percent on sharp decline in oil and commodities prices on Wednesday.
Selling by Japanese accounts against the yen was also a driver in its fall, with the Aussie/yen falling to a six-month low of 76.26 yen.
Highlighting the impact of the gloomy global economic outlook on commodities exporters and emerging markets, Brazil cut interest rates to a record low of 8.50 percent.
Forex: USD/CHF indifferent after Swiss GDP - FXStreet.com
Spain urged to come clean on bank bailout plan - The Guardian
DANIEL WOOLLS
Associated Press= MADRID (AP) — The European Union urged Spain on Thursday to come clean on how it plans to finance the overhaul of its banking sector, warning that uncertainty over this has contributed the recent market turmoil and the country's soaring borrowing costs.
A European Commission spokesman, Amadeu Altafaj, told Spanish National Radio that the conservative government in Madrid needed to spell out quickly how it plans to finance the recapitalization of troubled lender Bankia SA and whether there are other banks burdened by toxic real estate assets that might need assistance.
The government nationalized Bankia earlier this month, and the €19 billion ($23.6 billion) in public money that will need to be injected is more than twice what the government had estimated.
Doubts over how recession-hit Spain will handle the bailout have sparked concerns that the country itself will soon follow Greece, Portugal and Ireland in asking for financial assistance. Spain's borrowing costs on the international debt markets — a sign of investor confidence in how well it can pay off its debt — have hit worrying levels while its stock prices have been taking a pounding.
"No one can expect that, with these negative results of some banks, the markets can react with euphoria," Altafaj said.
Spain's deputy prime minister was headed to Washington to discuss the economic crisis with the U.S. Treasury Secretary Tim Geithner and Christine Lagarde, the head of the International Monetary Fund, which has been involved in all previous sovereign bailouts in Europe.
Altafaj said it would be best if the Spanish government turned to capital markets to finance the clean-up of Bankia, the country's fourth largest bank, but stressed that if it is going to need external money it should say so soon.
"What you cannot do is maintain this uncertainty, which is what is dragging down market confidence," the spokesman said.
Speaking in Brussels Thursday, European Central Bank head Mario Draghi criticized national regulators — including Spain's — for choosing "the worst possible way" to help their banking sectors by delaying tough decisions.
Citing the example of Bankia's current bailout, Draghi hit out at Spanish banking authorities for underestimating the extent of the nationalized lender's problems and "then come out with a first assessment, a second, a third, fourth."
"That is the worst possible way of doing things, because everybody ends up doing the right thing but at the highest possible cost and price."
Despite months of painful austerity reforms by the new government, there is growing concern that Spain's new leaders have not done enough and more Spanish banks may need to be saved amid mountains of loans gone bad and foreclosures of property now worth far less than the loans paid out to build it. Some estimates put a complete Spanish sector bailout cost at between €50 billion and €150 billion. But Spain only has €5 billion left in the €19 billion bank bailout fund it established in 2009. This means the country will have to raise the money in bond markets.
Spain is a weak link in Europe not only because of its banks, but also because of poor economic growth prospects that show little sign of improvement. The economy is mired in its second recession in three years and forecast to shrink 1.7 percent for the year. Nearly one of every four Spaniards is unemployed and one-half of all those under 25.
The spending cuts and poor economic prospects have also prompted unrest, as in other European countries. Striking coal miners on Thursday became the latest group to march in Madrid, complaining that government funding cuts in the sector doom it to collapse. Several thousand miners demonstrated, and police baton-charged one group that was throwing stones and bottles. Police said two people were arrested and nine were slightly hurt.
Deputy PM Soraya Saenz de Santamaria travelled to Washington on Thursday as the borrowing costs — or yields — on Spanish bonds remained stuck at dangerously high levels. The 10-year bond was at 6.45 percent, down slightly from the previous day, according to financial data provider FactSet. Spain's Ibex 35 stock index closed almost flat, with a 0.01 percent drop, ending a month of steep losses.
Meanwhile, Spanish Prime Minister Mariano Rajoy's efforts to contain the crisis won praise from German Chancellor Angela Merkel, who noted the leader "has inherited a difficult situation."
"He is the first who has taken up the decision with determination to bring transparency to the situation. That's a right and important step," she said.
But in a further blow for Spain, Fitch ratings agency Thursday downgraded the creditworthiness of eight Spanish regions. Like the country's banks, Spain's autonomous regional governments are burdened by heavy debts.
Fitch said in a statement that the downgrades "reflect the negative economic and market environment in Spain, which has resulted in depressed fiscal revenues, and the structural fiscal deficits of the regional administrations, which will require considerable additional efforts to be reduced, and also the difficulties in accessing long-term funding."
Also Thursday, Spain's central bank released figures that show investor money is gushing out of the country: a record €66.2 billion in March alone, about double the figure for December, which was already a record. This flight stemmed from foreigners selling stocks and shedding Spanish state debt and private bonds, as well as Spanish banks and citizens depositing money in foreign banks.
The country's trade deficit narrowed in March to €2.637 billion from €4 billion the same month last year, the central bank said. It attributed the change to 3.1 percent year-on-year increase in exports and a drop, by the same margin, in imports.
Economy Minister Luis de Guindos told Parliament an IMF report on the Spanish banking sector will be released June 11, and two independent auditors hired to assess Spanish banks' loan portfolios and capital needs will complete their work in late July.
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Jorge Sainz in Madrid, Barry Hatton in Lisbon and Juergen Baetz in Stralsund, Germany contributed to this report.
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