FOREX-Euro falls to 8-1/2-month low vs dollar on Greece

* Greek draft budget forecasts bigger deficit, Dexia weighs

* Euro hits 8-1/2-month trough versus dollar
(Updates prices, adds details, comments)

NEW YORK, Oct 3 (Reuters) - The euro fell to an 8-1/2-month
low against the dollar on Monday as mounting fears of a Greek
default deepened investor concern about the euro zone's banking
sector.

With Europe still deeply divided over how to tackle the
spiraling debt crisis and the risks that poses for the bigger
euro zone economies and the financial sector, the euro is
likely to stay under pressure, market players said.

The euro was down 1 percent at $1.32528 EUR=EBS on
electronic trading platform EBS, having fallen to a low of
$1.32372 -- its lowest since mid-January.

Against the safe-haven yen, the euro was down 1.4 percent
at 101.677 yen EURJPY=EBS on EBS. Earlier it touched a low of
101.532, the lowest since at least 2004 on EBS.

"The economic and financial climate continues to cool and
incertitude will force wary investors to maintain a defensive
posture," said Jessica Hoversen, foreign exchange analyst at MF
Global in New York. "The U.S. dollar will stay the chief
beneficiary of the dampened outlook for growth and the
escalating crisis in Europe."

Moody's put the rating of financial services group Dexia
(DEXI.BR) on review for possible downgrade with the bank
looking stretched by its exposure to Greece, raising pressure
on its state shareholders to consider a second bailout. For
more see [ID:nL5E7L30GX].

Euro zone finance ministers were meeting on Monday and are
expected to put pressure on Greece to implement agreed
structural reforms and to discuss options for leveraging the
European Financial Stability Facility [ID:nL5E7L30G0].

That meeting comes after Greece said it would miss a
deficit target set just months ago. [ID:nL5E7L30G3]

With the debt crisis showing little sign of abating, the
euro zone's manufacturing contraction deepened in September as
new orders shrank at their fastest pace since June 2009.

Investors are also awaiting a European Central Bank
interest rate decision on Thursday. Some market players are
expecting it to cut rates by 25 basis points and announce fresh
liquidity measures to support the banking sector.

The dollar trimmed gains versus the euro on Monday after
data showed U.S. factory activity expanded faster than expected
in September. [ID:nEAPA30DL0]

EURO SHORT POSITIONS

Speculators have been adding to their bearish bets against
the euro and this trend is likely to continue [IMM/FX].

"The market is short euro and rightly so, with fundamental
factors backing it up," said Chris Walker, forex analyst at UBS
in London. "We could see some short-term unwinding but that
will give investors a better level to sell. We expect investors
to continue building short positions against the euro."

The options market points to a strong appetite for
long-term euro/dollar puts -- bets that the euro will weaken.
One-year risk reversal spreads EUR1YRR=ICAP remain near a
record high hit recently.

The greenback eased 0.4 percent against the yen to 76.699
yen having hit a two-week high at 77.27 yen on EBS JPY=EBS.
Orders are seen around 77.50, traders said.

Tokyo dealers also reported macro funds building dollar
long positions and analysts said that if the current crisis
deepened, this time the yen could weaken versus the dollar,
unlike the global financial crisis in 2008.

Concerns about cooling global growth prompted both
leveraged and macro funds to unwind positions funded in the
dollar and the yen. As a result, the risk-sensitive Australian
dollar hit a 10-month low at $0.9578 AUD=D4 [ID:nL3E7L30AI].

The Aussie was also hurt by proposed U.S. legislation to
raise duties on a small portion of imports from China. Any
Chinese-U.S. trade spat would affect exports from Australia to
China. [ID:nL3E7L31HQ]
(Reporting by Nick Olivari; Editing by James Dalgleish)