Euro tumbles on Greek exit fears

An illustration picture shows Euro banknotes in Brussels November 28, 2011.

NEW YORK (Reuters) - The euro slumped 1 percent against the U.S. dollar on Tuesday, ahead of an informal meeting of European leaders, on growing fears of a Greek exit from the euro zone.

Dow Jones quoted former Greek prime minister Lucas Papademos as saying that Greeks had no choice but to stick with a painful austerity program or face a damaging exit from the euro zone, a risk he said was unlikely to materialize but that was real.

He also told the news agency that some European states and institutions were considering contingency plans for any eventuality.

"Sentiment is heavily against the euro," said Joseph Trevisani, chief market strategist at Worldwide Markets, Woodcliff Lake in New Jersey. "Any negative comment from former or current Greek officials sends the euro plummeting. There were also stop-loss orders below $1.2700 which accelerated the move down."

Investors also doubted whether an informal meeting of European leaders on Wednesday would yield much progress in tackling the region's debt crisis.

While there have been hopes that the summit may lead to agreement on measures to boost euro zone growth, investors were not confident of a breakthrough given apparent differences in opinion between Germany and France.

French President Francois Hollande is expected to push for a joint euro zone bond, a measure backed by Italy, Spain and the European Commission. However Germany, Europe's largest economy, opposes the move and continues to champion austerity measures.

"We don't expect Germany to cave and for any decisions to be made before the formal EU Summit which will be held after the Greek elections in late June," said Kathy Lien, director of currency research at GFT in Jersey City.

"Nonetheless, the world will be listening in closely for any hint of cooperation," she added. If German Chancellor Angela "Merkel shows any willingness to compromise with Hollande, euro/dollar will rally."

The euro was down 1 percent to $1.2686, having fallen as low as $1.2656 on Reuters data and edging back down towards last week's four-month low of $1.2640.

Concerns also remained about Spain's troubled banking sector. The Institute of International Finance said Spanish banks could need another 76 billion euros to cover loan losses.

Against the yen, the euro slipped 0.1 percent to 101.46 yen, reversing early gains. The dollar rallied 0.9 percent to 79.99 yen. Important support for the yen is at its 200-day moving average around 78.53 yen.

The yen tumbled after Fitch downgraded its credit ratings for Japanese government bonds to A-plus, citing Japan's rising public debt. But analysts doubted yen weakness could last.

"The yen has been trading very strongly based on overall uncertainty over the last couple of weeks. So I think it might just be a little bit of a pullback. I don't necessarily think it's sustained," said Fabian Eliasson, vice president for currency sales at Mizuho Corporate Bank in New York.

Analysts said risk aversion remains a key driver in the current uncertain environment and with a shrinking universe of safe-haven currencies the U.S. dollar should retain a better bid tone overall.

The U.S. dollar index, which tracks the value of the greenback versus a basket of six currencies, rose 0.7 percent to 81.640 .DXY.

Flows data from U.S. custody bank BNY Mellon showed that the U.S. dollar was the most bought currency on Tuesday, with net inflows accelerating in recent sessions at a pace that was twice as strong as seen last year.

The greenback held gains after data showed U.S. existing home sales rose 3.4 percent to their highest annual rate in nearly two years, although the market's reaction was limited.

(Additional reporting by Gertrude Chavez-Dreyfuss and Nick Olivari; Editing by James Dalgleish)