FOREX NEW YORK COMPANIES

* Euro undermined by receding hopes on EU summit

* Hits 2-week low vs yen, near 4-week low vs sterling

* Spain's short-term borrowing costs leap at auction

* Yen firm, but political uncertainty in Japan may weigh

By Jessica Mortimer

LONDON, June 26 (Reuters) - The euro hit a two-week low against the yen and a near-four-week low against the British pound on Tuesday, hurt by rising peripheral euro zone bond yields and expectations a European summit would achieve little to help resolve the region's crisis.

The prospect of a quick move towards a banking union or issuance of common euro zone bonds looked increasingly unlikely, with German Chancellor Angela Merkel describing moves to share debt liability as "counter productive".

Low expectations for the summit, which takes place on Thursday and Friday, may make the euro less vulnerable to a sell-off, analysts said. But a rally following any unexpected positive outcome would merely provide an opportunity to sell.

The euro zone's debt problems showed no signs of abating, with Spain formally requesting aid for its banking sector on Monday, while Cyprus has become the fifth euro zone country to request help.

"There is increasing pessimism as to whether any degree of substantive action will be agreed at the summit. The most encouraging thing is that no one has any expectations, but that's as good as it can get," said Jeremy Stretch, head of currency strategy at CIBC.

"If there is any positive reaction I suspect it will be a case that the devil is in the detail and any rallies will be sold into." He added he expected the euro to drop towards $1.23 over the coming weeks.

Underscoring the funding difficulties facing Spain, the country's short-term borrowing costs nearly tripled at an auction on Tuesday, further encouraging investors to push the euro lower.

The euro dipped 0.1 percent against the dollar to $1.2495, pinned close to a two-week low of $1.24713. Traders cited selling by macro funds at higher levels and reported offers from sovereign investors above $1.2530.

Against the yen it lost around 0.5 percent to hit 98.916 yen on EBS trading platform, its weakest since mid-June, while against sterling it dropped to 79.875 pence, its lowest since the end of May.

"There are vague proposals on the table for discussion towards a closer fiscal union but frankly it is tough to see anything concrete coming out of the summit," said Chris Walker, currency strategist at UBS.

"Given the markets are already bearish on the euro, there is a risk of a short squeeze, but that would be a good opportunity to sell the euro."

The euro has support against the dollar at the June 12 low around $1.2443, but a break below there could open the door to a test of the two-year low of $1.2288 hit on June 1.

UBS said scepticism about the euro was reflected in the bank's latest flow monitor, which showed their clients continued to add to short euro positions last week, while overseas investors offloaded a net $2 billion worth of euro-denominated equities, the most since July 2008.

SHOWDOWN IN TOKYO

The risk of disappointment from another euro zone summit and risk aversion supported the Japanese yen and helped it pull away from a two-month low against the dollar.

But the currency could struggle as political uncertainty gripped Japan. Japan's lower house approved a plan to double the sales tax to help curb the nation's snowballing debt, although the vote split the ruling Democratic Party.

The dollar was down 0.3 percent at 79.39 yen, off a two-month high of 80.63 yen struck on Monday.

"The threat of heightened political uncertainty may weigh upon the yen in the near-term although it is more likely to be offset by ongoing negative developments in Europe which are still fuelling safe haven demand for the yen," Lee Hardman, currency economist at Bank of Tokyo Mitsubishi wrote in a note.

Some market players think the yen may come under pressure if a large number of ruling party lawmakers revolt against Prime Minister Yoshihiko Noda's tax hike plan, which could force him to call an early election. (Additional reporting by Anirban Nag; editing by Ron Askew)

* For now support for euro/dlr seen around $1.2443

* Yen off 2-month low, ponders if Noda can stay on

By Hideyuki Sano

TOKYO, June 26 (Reuters) - The euro was on the defensive near a two-week low against the dollar on Tuesday on growing worries that an upcoming European summit would produce nothing to solve the region's debt crisis.

The broad risk-averse mood helped to lift the Japanese yen sharply from a two-month low against the dollar, though the currency could be hit by political uncertainty in Tokyo as Japanese Prime Minister Yoshihiko Noda faces a revolt against his tax hike plan.

The euro fell to as low as $1.24713 on Monday, its lowest since June 12 and last stood at $1.2507, almost flat from late U.S. levels.

Support was seen near the June 12 low around $1.2443, at and below which sizable bids were detected, though a break below that level would open the door to a test of the two-year low of $1.2288 hit on June 1.

German Chancellor Angela Merkel dashed any lingering hope in financial markets on Monday that Europe would issue common euro zone bonds to help indebted countries, calling such an idea "economically wrong" and "counterproductive."

Greece's new finance minister resigned on Monday due to ill health, throwing the government's drive to soften the terms of an international bailout into confusion, while Prime Minister Antonis Samaras had said he was not attending the summit, having just emerged from hospital himself after eye surgery.

Cyprus became the fifth euro zone country to turn to Brussels for help, a move that highlights Europe's failure to contain the ever-deepening debt crisis, even though its economic impact would be negligible given the size of the country's economy.

And Spain formally requested euro zone rescue loans for up to 100 billion euros ($125 billion) to recapitalise its debt-laden banks, though it said the final amount of financial assistance would be set later.

All of these served to quash hopes that European policymakers would come up with solid measures to deal with the ongoing crisis at its June 28-29 summit that is now threatening not just Spain but Italy, the bloc's third-largest economy.

"Yesterday in Asia, people were saying they would wait for the summit. But it's becoming almost pointless to wait for it," said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp.

The euro also fell below 100 yen to fetch 99.72 yen , having dropped more than 1 percent on Monday after having failed to break a 38.2 percent retracement of its March-May decline at 101.64 last week.

A daily close below near-term trendline support at 99.51 will indicate its corrective rebound so far this month is coming to an end, analysts at RBC Capital Markets said.

SHOWDOWN IN TOKYO

The dollar also fell more than a full cent to 79.55 yen from a two-month high of 80.63 yen hit on Monday, failing to stay above a key chart level from the top of weekly Ichimoku cloud at 80.41, in one bearish sign.

Strong resistance prompted some hedge funds that had built yen short positions on speculation about more easing by the Bank of Japan are giving up on their bets, said a U.S. bank trader.

Some market players think the yen could come under pressure if a large number of ruling party lawmakers revolt against Noda's tax hike plan, which could force him to call an early election.

Noda looks certain to win parliament's approval for his signature tax hike plan, thanks to support from the two main opposition parties.

But with a number of ruling party lawmakers threatening to vote against the bills and to leave his Democratic Party of Japan, he is facing risk of losing a parliamentary majority, which could lead to an early election. (Reporting by Hideyuki Sano; Editing by Eric Meijer & Kim Coghill)