* Euro falls 1.2 pct vs dlr <EUR=>; hits 8-yr low vs yen
* Stocks slide sharply, adding to risk pullback
* Aussie dollar falls to 10-month low vs U.S. dollar
* Tensions rise in Korean peninsula
(Adds detail, updates prices)
By Tamawa Desai
LONDON, May 25 (Reuters) - The euro hit a 8 1/2-year low
against the yen and neared a 4-year low versus the dollar on
Tuesday as concerns about the euro zone's banking system
prompted investors to pull back from riskier assets.
Such concerns fanned strains in money markets, boosting
demand for dollars across the board.
Weighing on the euro was the Spanish central bank's takeover
of savings bank CajaSur on Saturday after a failed merger with
another regional lender. []
Although CajaSur is relatively small and the Bank of Spain
has said it wants to halve the number of ailing small lenders,
analysts said the bailout highlighted weakness in the European
banking sector and fanned fears more banks may need to be bailed
out by some euro zone members.
"Spanish banking fears certainly exacerbate contagion
risks," said Lee Hardman, currency economist at Bank of
Tokyo-Mitsubishi UFJ.
U.S. two-year swap spreads pushed out to their widest in two
years, reflecting tightening money market conditions.
European shares fell 2.5 percent <>. U.S. stock
futures <SPc1> lost 2.6 percent, indicating a sharply lower open
on Wall Street after it fell more than 1 percent on Monday.
By 1108 GMT, the euro was down 1.2 percent on the day at
$1.2200 <EUR=>, nearing a four-year low of $1.2143 hit last
week.
Against the yen, the euro fell to 108.88 yen <EURJPY=R>, its
lowest since Dec, 2, 2001, according to Reuters charts. The pair
was down 2 percent from late U.S. trade on Monday.
"Fears are growing that a collapse in confidence could undo
the positive growth impulses that are still present, with
tensions in money markets resulting in dollar liquidity drying
up," said Kenneth Broux, senior market economist at Lloyds TSB.
The euro has lost more than 7 percent versus the dollar this
month, heading for its biggest monthly fall since January 2009.
The euro's downside targets stood at the recent low of
$1.2143 and at $1.2133, a 50 percent retracement of a rally from
its all-time low around $0.8225 in October 2000 to its record
peak of $1.6040 touched in July 2008, traders said.
STOPS
The next support would be the psychologically important
$1.2000, where many stops are believed to be set, they said.
Funding conditions for banks have also been tightening.
U.S. dollar 3-month Libor/OIS spreads were sharply wider on
Monday, with the 3-month Libor hitting a 10-month high,
indicating stressed conditions in the money market.
The dollar index rose 1.3 percent to 87.30 <.DXY>, nearing a
14-month high of 87.45. The greenback dipped 0.8 percent to
89.43 yen <JPY=>.
Growth-linked currencies such as the Australian and New
Zealand dollars saw sharp pullbacks.
The Aussie dropped 2.3 percent against the yen <AUDJPY=R>
and fell to a 10-month low versus the U.S. dollar <AUD=D4> of
$0.8066. Traders reported strong selling interest above $0.8120.
Sterling showed little reaction to data showing Britain's
economy grew by 0.3 percent in the first quarter of this year,
slightly faster than the 0.2 percent initially estimated. []
Tensions in Korea buoyed the dollar and yen, after South
Korea's Yonhap news agency said North Korean leader Kim Jong-il
had told his troops to prepare for combat. []
(Additional reporting by Neal Armstrong, editing by Patrick
Graham)
