FOREX-Euro hugs 2-week low on worry about Italian leadership
* Monti's offer to quit raises uncertainty over pro-euro stance
* Euro hurt by bleak German econ outlook, ECB rate cut expectations
* Strong US job data supports dollar
* Dollar/yen may have downside after failed chart break
* Canadian dollar at 7-week high on data, takeover approval
TOKYO, Dec 10 (Reuters) - The euro flirted with two-week lows against the dollar on Monday after Italian Prime Minister Mario Monti offered to resign, raising political uncertainty over who will lead the euro zone's third-biggest economy out of the debt crisis.
In contrast, the dollar drew support from strong U.S. jobs data last Friday, though caution about fresh easing steps from the U.S. Federal Reserve later this week is curbing its advance.
"If Monti's pro-euro stance is to back off, that should raise concerns about the euro," said Junya Tanase, chief currency strategist at JPMorgan Chase in Tokyo.
The euro fell as much as about 0.3 percent to $1.2880 , near a two-week trough of $1.2876 set on Friday. It last stood at $1.2908, down about 0.2 percent from late U.S. levels.
Monti's surprise announcement at the weekend came a few days after former Prime Minister Silvio Berlusconi abruptly withdrew support for Monti's technocrat government, formed more than a year ago in an effort to restore Italy's credibility with investors.
An election is expected to be brought forward to February, where, at the moment, the pro-European centre-left Democratic Party is seen as having a strong advantage over an anti-Monti front from Berlusconi and a new anti-establishment party, which comes second in polls.
Germany's central bank on Friday warned that the euro zone's biggest economy could soon enter recession, weighing on the euro.
So did comments from a European Central Bank policymaker on Friday that an interest rate cut was possible next year if the euro zone economy does not pick up.
The bleak view contrasted with strong U.S. job data published on Friday, which showed hiring by firms rose to 146,000 in November from 138,000 in October, defying predictions of a blow from superstorm Sandy.
The U.S. unemployment rate also fell to a near four-year low of 7.7 percent, though analysts cautioned that the fall was partly due to decline in the labour participation rate, suggesting some Americans were giving up job-hunting.
A big drop in U.S. consumer confidence took some shine off the dollar, and the dollar's upside is also capped in the lead-up to this week's Federal Reserve policy meeting.
Many economists think the Fed will announce on Wednesday monthly bond purchases of $45 billion, signalling it will continue to pump money into the U.S. economy during 2013 in a bid to bring down unemployment.
"Despite a drop in the unemployment rate, we expect the Fed to convert the expiring Operation Twist programme into an outright purchase programme, with a purchase distribution similar to the current programme," Barclays Capital analysts wrote in a note.
Also not helping the dollar, there are few signs that Washington policymakers are moving closer to averting tax hikes and spending cuts set to take hold next year, which analysts say could see the U.S. economy swing back into a recession.
President Barack Obama met with top Republican leader John Boehner on Sunday to discuss ways to avoid the 'fiscal cliff', but a resolution remained elusive.
Against the yen, the dollar was slightly weaker at 82.41 yen . Its failure on Friday to break above last month's high of 82.84 yen after the strong jobs data may not bode well for the U.S. currency, some analysts said.
"The dollar did not rise despite rise in dollar bond yields. With yen short positions already at a high level, the dollar could fall quite fast," said JPMorgan's Tanase. U.S. regulator data showed speculators' net yen short positions last week rose to their highest level since mid-2007.
The yen showed no immediate reaction to Japan's revised gross domestic product data, which showed the economy contracted for two straight quarters. April-June GDP was revised down to a small contraction of 0.03 percent while July-Sept figure was unchanged from preliminary reading of 0.9 percent fall.
The Canadian dollar hit a seven-week high against the U.S dollar, which fell to as low as C$0.9865, following strong Canadian job data and the government's approval of the takeover of energy company Nexen by China's oil giant CNOOC.
The Australian dollar slipped after China's November trade numbers came in well below market expectations, with exports rising an anaemic 2.9 percent and imports flat year-on-year.
But other China data published on Sunday was more upbeat, with factory output and retail sales jumping to eight-month highs in November, helping to support the Aussie.
The Aussie fell 0.1 percent to $1.0474, still not far from a 11-week high of $1.0515 hit on Thursday.
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