FOREX-Euro resumes declines on doubts over aid package

* Relief impact of emergency aid package proves temporary

* Focus shifts back to debt problems in euro zone

* Sterling rebounds from early losses (Adds quote, detail, updates prices)

By Wanfeng Zhou

NEW YORK, May 11 (Reuters) - The euro fell on Tuesday as concerns about the euro zone's ability to contain its debt crisis overcame the initial euphoria that followed announcement of a $1 trillion rescue package.

Germany approved its share of the rescue package on Tuesday, but the euro dropped back near $1.27, as doubts grew whether weaker euro zone economies can deliver drastic debt cuts. The euro on Monday had risen to a high near $1.31 on news of the joint European Union-International Monetary Fund rescue.

"Markets aren't buying the story. It's clear that the markets remain very concerned about the fiscal outlook for Europe," said Mike Moran, senior currency strategist at Standard Chartered Bank in New York. "Clearly, the near-term outlook is one of skepticism for the euro."

In midday New York trading, the euro was down 0.6 percent at $1.2710 EUR=, substantially below Monday's high of $1.3093, according to Reuters data. Traders cited sales from macro accounts, while poor liquidity was said to be exacerbating currency moves.

Last week, the single euro zone currency fell to a 14-month trough around $1.2510 on fears the sovereign credit crisis could spread from Greece to other euro zone countries.

Moran expects the euro to decline to $1.15 by the third quarter.

The options market was showing a clear bias toward the downside on the euro. The one-month risk-reversal EUR1MRR=ICAP was trading at 3.00 for euro puts versus 2.65 on Monday, moving beyond the previous record seen at the peak of the Lehman crisis.

Against sterling, the euro fell 1.5 percent to 84.81 pence EURGBP=D4.

Sterling rose againt the dollar, last trading up 0.7 percent GBP=D4 at $1.4947, rebounding from earlier losses.

Talks to form a new British government entered a decisive phase on Tuesday with speculation the Conservatives were close to clinching a deal with the smaller Liberal Democrats while Labor was being sidelined. See [ID:nLDE6492UW]

NOT ENOUGH

There was increasing skepticism over the EU's rescue plan on Tuesday. Nout Wellink, a member of the European Central Bank's governing council, in Dutch newspaper NRC Handelsblad said the package is not enough to save the euro zone structurally.

On Monday, Moody's Investors Service said it may still downgrade its credit rating on Portugal and said Greece's rating could fall to junk grade. See [ID:nN10227186]

The aid package "is just another way of delaying perhaps the inevitable," said Shaun Osborne, chief FX strategist at TD Securities in Toronto. "It pushes the debt problems further down the road."

Analysts said the European Central Bank's decision to buy government bonds could also hurt the euro later this year as it further dampens the likelihood of interest rate hikes in the euro zone.

"I don't think we're going to see perhaps quite as rapid a fall in the euro over the next few months as we've seen over the course of the past few weeks. I think the decline is going to slow down, but certainly the trend is towards a weak euro over time," Osborne said.

The low-yielding yen posted strong gains, reversing some of the previous day's losses, as concerns over the euro zone debt crisis sparked renewed risk aversion among investors.

The dollar was last down 0.5 percent at 92.83 yen JPY=. Traders said the yen was helped by Japanese exporters selling other currencies. The euro fell 1 percent to 118.10 yen EURJPY=R.

The U.S. dollar also benefited from safe-haven flows. Against a basket of major currencies, the ICE Futures U.S. dollar index .DXY was up 0.2 percent at 84.352. (Editing by Leslie Adler)