Forex weekahead - Euro drops as drama unfolds on Greek vote

A banner featuring a Euro coin is seen on the European Commission headquarters building ahead of a European Union heads of state summit in Brussels October 26, 2011.

NEW YORK (Reuters) - Investors will remain wary of placing bets in favour of the euro even if Greece's government survives a confidence vote as uncertainty about Europe's bailout package and concerns about other debt-burdened countries weigh on the single-currency.

Fears about Greece, the euro zone and the global economy had pushed the euro down 2.8 percent against the dollar for the past week, its worst weekly performance since mid-September.

Greek parliamentarians prepared to give their verdict on Prime Minister George Papandreou on Friday. Should his government fall and new elections are called, an EU bailout plan could be put in jeopardy.

Without the 130-billion-euro bailout deal, Greece could default on its sovereign debt and cause the euro-zone crisis to spread, possibly limiting credit and growth worldwide.

Some investors are expecting Greece's Papandreou to step aside as a new unity government leads the nation.

"Next week, I doubt the euro will rise to $1.40, but actually see it slowly falling to $1.35," said Greg Anderson, G10 strategist at CitiFX, a division of Citigroup in New York. "We expect some kind of change in government in Greece, with Papandreou likely stepping down so a unity government can be formed.

"The forming of a unity government is potentially not a toxic event because Greece's opposition government has come around to accepting the terms of the troika."

Greece's troika of lenders includes the European Central Bank, the European Union and the International Monetary Fund. They recently agreed to give Greece another tranche of aid, but only if the country imposes strict austerity measures.

"Taking the element of Greece's political instability out of the equation, at least for awhile, should be a market- stabilizing factor," Anderson said. "However, the euro will likely struggle to gain ground as issues in Italy and throughout the euro zone persist, and with a fair amount of key European economic data emerging next week."

Papandreou's move to ditch plans for a referendum on the EU bailout caused the euro to gain smartly against the dollar during the previous session, despite a surprising interest-rate cut from the European Central Bank.

"However, the euro remains vulnerable to additional selling as a result of mounting signs the 17-member bloc is slipping back into recession and officials will be unable to ring-fence larger nations like Italy and Spain from the bloc's debt crisis," said Omer Esiner, chief currency strategist at Commonwealth Foreign Exchange in Washington.

Analysts said Friday night's parliamentary confidence vote, which Papandreou called when he first announced the referendum plan earlier this week, was too tight to forecast.

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Another negative for the euro: Comments by German Chancellor Angela Merkel, who said few countries in the Group of 20 leading economies had committed to participating in Europe's bailout fund.

Euro-zone leaders agreed on October 26 to scale up the bailout fund, but gave no firm details on the sources of the extra money.

By late in the day, the euro was trading at $1.3780, down 0.2 percent from Thursday in New York.

Investors are also focussed on Italy after Prime Minister Silvio Berlusconi refused to step down on Friday despite growing desertions from his own centre-right coalition.

Underlining the foreboding atmosphere, yields on 10-year Italian bonds hit a euro lifetime high of 6.43 percent at one point on Friday, close to levels that led to bailouts of Ireland and Portugal.

The euro earlier got a brief lift against the dollar from data showing the U.S. jobless rate fell to a six-month low in October.

Currency speculators increased bets in favour of the U.S. dollar in the latest week, according to data from the Commodity Futures Trading Commission released on Friday.

The greenback was up 0.1 percent against the yen at 78.140, remaining below 80 despite Japan's mammoth intervention on Monday to weaken its currency,

(Reporting by Julie Haviv; Additional reporting by Gertrude Chavez-Dreyfuss, Steven C. Johnson and Nick Olivari; Editing by Jan Paschal)