FOREX-Euro sags to near 7-week low vs. dollar after messy Italy vote
* Italy election results raise fear of political paralysis * A break of $1.3032 could open way for test of Jan 4 low below $1.30 * Yen up on a long overdue correction - analyst * Pound near 31-month low ahead of BoE King's speech in Tokyo By Hideyuki Sano TOKYO, Feb 26 (Reuters) - The euro skidded close to a seven-week low against the dollar while the yen kept some distance from multi-month lows on Tuesday as the spectre of political gridlock in Italy spurred traders to seek refuge in the U.S. and Japanese currencies. Italy's centre left won the lower house as widely expected, but projections by Italian media indicate no party or coalition will be able to form a majority in the upper house or Senate. A deadlocked parliament could threaten Italy's economic reforms and reignite fears about euro zone debt. That could reverse the optimism that the worst of the region's crisis was over, which had benefited the euro and riskier assets in general earlier this year. The euro traded at $1.3056 by midday, after falling as low as $1.3042, its lowest since Jan. 10. Support lies at $1.3032 from the bottom of the daily Ichimoku charts. A break there would send a strong bearish signal and is likely to open the way for a test of its Jan. 4 low of $1.2998. The common currency tumbled sharply particularly against the yen, having fallen 2.6 percent on Monday, its biggest daily loss since May 6, 2010, when investors were shocked by violent street protests in Greece sparked by austerity measures. The euro fell to as low as 118.74 yen on Monday, down a whopping 6.5 yen from that day's high of 125.36 yen. It last traded at 120.16 yen. The dollar last traded at 92.03 yen, up about 0.2 percent from late U.S. levels in a volatile trade, on expectations of buying from Japanese importers. The dollar index against a basket of other major currencies rose 0.2 percent. In Monday's whipsaw trading, the dollar tumbled as low as 90.85 yen, its lowest in nearly a month, from a 33-month high of 94.77 yen hit earlier in the day on the news that Japan plans to nominate an advocate of aggressive monetary easing, Asian Development Bank President Haruhiko Kuroda, as the next central bank governor. Analysts say steep losses in the yen in recent months on bets of further monetary easing in Japan have made it vulnerable to sharp reversals. Japanese Prime Minister Shinzo Abe's repeated calls for more forceful central bank action was the main force behind the yen's nearly constant decline since November. "The yen was long overdue for a correction and all it needed was a catalyst. The yen's downtrend may have run its course for the time being," said Teppei Ino, currency strategist at the Bank of Tokyo-Mitsubishi UFJ. While expectations of more BOJ easing could cap the yen, the Japanese currency could gain, at the expense of risk currencies, if risk appetite abates further. In addition to the Italian gridlock, a U.S. stalemate over spending cuts that threaten the economic recovery undermined market sentiment. President Barack Obama and Congress remain deadlocked over how to prevent $85 billion in automatic government spending cuts set to start on March 1. Investors' immediate focus will be on U.S. Federal Reserve chief Ben Bernanke's congressional testimony at 1500 GMT, with some rattled by debate within the Fed about how long it should keep buying bonds to support the economy. Sterling held a bit above its 31-month low against the dollar hit on Monday, though it is seen as vulnerable on expectations the Bank of England could expand its quantitative easing further to bolster the fragile UK economy. The pound bought $1.5205, holding above Monday's low of $1.5073. Bank of England Governor Mervyn King will speak in Tokyo at 0600 GMT.