FOREX NEW YORK COMPANIES

* Yen falls as Fitch downgrades Japan ratings

* Germany says euro bonds do not offer solution

* But traders still wary of short squeeze potential in euro

By Jessica Mortimer

LONDON, May 22 (Reuters) - The euro fell on Tuesday as scepticism grew that an informal meeting of European leaders would yield much progress in tackling the debt crisis, with worries about Greek politics and Spanish banking problems expected to keep the currency weak.

While there have been hopes in some quarters that measures to boost growth may be agreed at Wednesday's summit, investors were not confident of a breakthrough given apparent differences in opinion between Germany and France.

French President Francois Hollande is expected to push for a joint euro zone bond, a measure backed by Italy, Spain and the European Commission.

However Germany, Europe's largest economy and paymaster, has so far opposed the move and continues to champion austerity measures. A German official said on Tuesday euro bonds did not offer a solution to the region's problems.

"Very little is likely to come out of this summit ... The pressure remains on the downside in euro/dollar and any rebounds will be sold into in this environment," said Ian Stannard, head of European FX strategy at Morgan Stanley.

"We have very little progress on the policy front which will leave the euro exposed."

The euro was down 0.5 percent against the dollar at $1.2752, though it held above last week's four-month low of $1.2642.

However, with speculators' short euro positions at a record high, traders were wary of any development that could trigger a squeeze higher.

"I doubt any news out of the meeting tomorrow will be able to create a positive environment, but people booked some profit at the end of last week and may be waiting for better levels to sell the euro," said Niels Christensen, FX strategist at Nordea.

Concerns also remained that Greece could leave the euro after elections next month and about Spain's troubled banking sector. The Institute of International Finance said Spanish banks could need another 76 billion euros to cover loan losses.

YEN FALLS ON FITCH MOVE

The yen lost ground against the dollar after Fitch rating agency cut Japan's long-term ratings to A+, citing Japan's high and rising public debt ratios and a "leisurely" fiscal consolidation plan.

The dollar was up 0.55 percent against the yen at 79.76 yen .

However, analysts expected falls to be limited as investors seek safety given the risks the euro zone debt crisis poses to the global economy.

"The initial market reaction has been to weaken the yen but I don't think that is sustainable. It is likely that the yen will remain strong," Morgan Stanley's Stannard said.

The OECD said on Tuesday the United States and Japan were leading a fragile economic recovery among developed countries but that this could be blown off course if the euro zone fails to contain its debt crisis.

The Bank of Japan begins a two-day policy meeting on Tuesday, with most market players expecting the BOJ to keep policy on hold after easing last month.

Some speculation in the market that the BOJ may opt for more easing could also boost the yen if it keeps policy unchanged.

That could push the dollar below 79 yen, setting it on course to test the important support level of its 200-day moving average, around 78.53 yen.

* Traders still wary of short squeeze potential

* Growth/austerity debate expected at EU summit

By Nia Williams

LONDON, May 22 (Reuters) - The euro steadied against the dollar on Tuesday as its rebound from a recent four-month low stalled, although traders said selling was likely to be limited in the run-up to an informal meeting of European leaders this week.

Many in the market were sceptical policymakers could agree measures to help tackle the euro zone debt crisis and soothe concerns about Greek political turmoil and weakness in the Spanish banking system.

But with speculators' short euro positions at a record high, traders were wary of the potential for a squeeze higher on any signs of progress at Wednesday's meeting.

The euro dipped 0.1 percent against the dollar to $1.2802, but holding above last week's four-month low of $1.2642.

"I doubt any news out of the meeting tomorrow will be able to create a positive environment, but people booked some profit at the end of last week and may be waiting for better levels to sell the euro," said Niels Christensen, FX strategist at Nordea.

"Even if the political leaders were to pull an agreement out of the hat we need something that's going to take immediate effect. I see a bit of consolidation in euro/dollar and then more downward bias."

Market players saw support for the euro around $1.2789, the 23.6 percent retracement of the May fall from $1.3283 to $1.2642, and traders reported offers from Asian central banks above $1.2825-30 that were expected to cap gains.

French President Francois Hollande is expected to push for a joint euro zone bond at the EU meeting in Brussels, a measure backed by Italy, Spain and the European Commission. However Germany, Europe's largest economy, has so far opposed the move and championed austerity measures to tackle the crisis.

"The market has been sort of supporting the German line of tough austerity. But that may be changing as well," said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

"Investors who have risk assets want their prices to rise and it's becoming clear austerity measures alone are not going to bring about that."

Many market participants were cautious ahead of the summit, which could highlight a deep divide between the German-led drive for austerity and the efforts to put more focus on growth, a pledge of the new French president.

BOJ MEETING EYED

Although the euro struggled versus the dollar it climbed 0.2 percent against the yen to 101.84. The dollar also rose 0.3 percent against the Japanese currency to 79.51, off a three-month low of 79.002 hit on Friday.

The Bank of Japan begins a two-day policy meeting on Tuesday, with most market players expecting the BOJ to keep policy on hold after easing last month.

However, speculation the BOJ could ease further raised the possibility the yen could rise if it kept policy on hold.

That could push the dollar below 79 yen, setting it on course to test the important support level of its 200-day moving average, around 78.53 yen.

The Australian dollar rose 0.2 percent to US$0.9931 , rising clear of a six-month low of US$0.9794 hit last week thanks to broad recovery in riskier assets on Monday.