FOREX-Euro drops sharply vs dollar as debt fears dominate

* Euro down vs dlr, 1st time in 4 days on euro zone woes

* Fed Chairman Bernanke comments fails to rattle dollar

* Euro zone finance ministers to meet later on Monday (Updates prices, adds quote, details)

By Julie Haviv

NEW YORK, Dec 6 (Reuters) - The euro fell sharply against the dollar on Monday, marking its first decline in four sessions, as fears about euro zone peripheral government debt moved to the forefront, trumping dovish comments made by U.S. Federal Reserve Chairman Ben Bernanke.

The weak performance of the euro comes ahead of a meeting of euro zone finance ministers, who are under pressure to boost the size of a rescue fund to stop a debt crisis from spreading.

The euro EUR= was down 1.14 percent at $1.3261, according to Reuters data. Traders reported an options expiry on Monday at $1.3250.

IMF chief Dominique Strauss-Kahn will present a report, a copy of which was obtained by Reuters, to euro zone finance ministers meeting in Brussels, saying more action is needed from member states. [ID:nLDE6B40CZ]

This encouraged renewed selling of the euro after a rebound late last week took it back above $1.34, with traders citing selling by real money accounts and sovereign names.

Euro/dollar "has scope to move down further, with political developments and commitment from euro zone policymakers likely to be the focus," said Paul Mackel, director of currency strategy at HSBC.

The IMF report will say the euro zone should increase the size of its 750 billion euro rescue fund and the European Central Bank should boost bond buying markedly. [ID:nLDE6B40CZ]

With the euro resuming its decline, the dollar index .DXY was up 0.5 percent at 79.814, close to its 100-day moving average of 80.04.

BERNANKE AND QE2

The dollar also bounced on a bout of short covering as investors shrugged off comments from U.S. Federal Reserve Chairman Ben Bernanke that quantitative easing could be bigger than estimated. [ID:nN05271909]

Fed Chairman Bernanke appeared in an interview on CBS-TV's "60 minutes" late Sunday and communicated his view that it is possible that U.S. monetary policymakers increase the additional $600 billion in asset purchases announced at the last Fed meeting.

More asset purchases would be negative for the dollar, but his comments failed to hurt the greenback.

The weakness in the European currency complex is likely the primary reason for the dollar's support, nullifying the impact of Friday's nonfarm data which punished yields and sent the trade-weighted dollar down nearly 1 percent. This was its worst daily loss in over a month, according to Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.

"Reports that both President Trichet and the IMF have suggested that the size of the European bailout fund needs to be larger has removed the calm that had entered European markets late last week," she wrote. "The combination of the Irish budget vote, today's Eurogroup meeting and several ECB council member press conferences leaves a lot of room for headline risk."

Analysts and traders said Bernanke's comments on QE were not too bearish given Friday's below-forecast jobs data. [ID:nN02238002]

The euro briefly rose to $1.3380 after European clearing house LCH.Clearnet reduced the margin requirement on Irish government bonds to 30 percent from 45 percent of net positions of its margin rate. [ID:nLDE6B10EI]

Euro/dollar risk reversals showed the premium demanded to buy euro puts over calls rising again as the recovery in the spot euro above $1.34 looked to have run its course. The 25-delta 1-month risk reversal EUR1MRR=ICAP traded above 2.0 on Monday after falling to around 1.85 on Friday.

Latest data from the Commodity and Futures Trading Commission showed currency speculators trimmed bets against the U.S. dollar for a fourth straight week. [IMM/FX].

The dollar was up 0.25 percent to 82.83 yen JPY=, below its session high of 82.98, but climbing off Friday's three-week low of 82.52 yen and keeping well above the Ichimoku 'cloud' bottom around 81.70 yen.

(Additional reporting by Anirban Nag in London) (Editing by Theodore d'Afflisio)