* Greek euro exit looks set to trigger Lehman-like selloff
* No CEE assets would be immune to spike in risk aversion
* CEE markets still haven't recovered from sharp 2008 falls
By Jason Hovet and Carolyn Cohn
PRAGUE/LONDON, May 31 A Greek exit from the euro zone could thrust emerging European markets into a downward spiral similar to that seen during the 2008 financial crisis, when currencies lost up to a third of their value following the collapse of Lehman Brothers.
Europe's eastern currencies are among the world's 10 worst-performing against the dollar this month, alongside Syria's pound and better only than the kwacha of Malawi, where authorities scrapped the unit's peg to the dollar.
Policymakers across the region have taken pains to stress defences are stronger than four years ago, when the Polish zloty lost 32.5 percent against the euro in the six months after Lehman and stock indices were cut in half.
Investors have already shifted positions in anticipation of Greece's possible exit from the euro zone following a June 17 repeat election, and what investors fear would be a knee-jerk selloff of Polish, Hungarian, Czech, Romanian and other assets.
"I would not rule out a similar market reaction to what happened in the fourth quarter of 2008," said Thanasis Petronikolos, head of emerging market debt at London-based Baring Asset Management, which runs a $140 million fund that has a third of its assets in emerging Europe, Russia and Turkey.
"If Greece exits, then what happens to countries like Portugal, Ireland, Spain or Italy? Then ... we are into an uncharted territory."
ROADS TO CONTAGION
A harsh escalation of the euro crisis would hit growth in the east's export-dependent economies harder than other developing states, due to their close integration with their bigger neighbours and dependence on western European demand.
Another potential source of pain is deleveraging by the western-owned lenders that own around 70 percent of banking assets in the region.
A hit to exchange rates would cause payments on foreign currency loans held by Polish and Hungarian households to skyrocket, pushing up bad loans and intensifying losses.
Aware that the main channel of contagion remains capital markets, politicians are bracing for turmoil.
"I expect the very high volatility on foreign exchange market to continue until results of the Greek elections," Polish Deputy Finance Minister Dominik Radziwill told reporters earlier this month. "The outcome will have a huge impact on the euro zone, even polls may affect the euro and, in effect, the zloty."
Added Hungarian Prime Minister Viktor Orban: "We cannot exclude ... that there will be serious shock waves."
A Greek exit from the euro would technically have little direct effect on the 17-member bloc's economy, of which the Mediterranean state makes up just a tiny fraction.
But it would drive up debt yields for other euro zone states and their neighbours, by prompting a stampede of investors to assets perceived as more safe while the single currency's other members try to forestall a domino effect.
In a poll earlier this month, economists were almost evenly split on whether Greece would leave the euro, although in a Reuters poll published on Thursday, 19 of 30 fund managers said Greeks would still be using the euro at the end of next year.
Emerging European assets rallied to start 2012 but have retreated since Greece's inconclusive May 6 election.
Following one of its best quarters in a decade, the zloty has lost 4.9 percent against the euro in May. It has recovered only around a third of its post-Lehman drop since hitting 4.93 per euro in February 2009.
The forint, punished for Hungary's slow progress in securing a new EU/International Monetary Fund credit line, is down 4.8 percent for May and is hovering around its 2009 levels after hitting an all-time low of 324.2 per euro in January.
Romania's leu hit a record low last week, and the region's stock markets are down 6.7-12.5 percent in May, far shy of the 40-50 percent shed in the weeks after Lehman's demise.
The losses are still a shadow of those seen immediately after the collapse of Lehman Brothers, reflecting a retreat by investors rather than a full-scale withdrawal, but market players they would accelerate if a major event such as a Greek euro exit happens.
Data from Thomson Reuters Lipper show funds listed in emerging Europe bond and equity categories saw net outflows of an estimated $923 million over the first four months of the year - before this month's selloff.
Jiri Lengal, who manages $190 million in CEE funds for Investicni Spolecnost Ceske Sporitelny in Prague, said he has cut some risky positions and increased cash in his portfolio.
He sees a potential rebound after next month's Greek election, saying "Greece will not commit suicide", but said he is in a scarce minority.
"I think the pessimist camp is much stronger than the optimist camp," Lengal added.
If the Greek election does lead to Athens' departure from the euro, countries with high current account deficits, like Turkey, or where debt is high, like Hungary, would come under strong pressure, said Baring's Petronikolos.
London-based strategist Thanos Papasavvas, for Investec Asset Management, said he has moved to the sidelines in currency markets.
He is overweight Czech debt - seen as a regional safe haven - and underweight Poland "given the large component of foreign participation and high liquidity.
"Given the underlying uncertainty we remain cautious on our positioning," Papasavvas said. (Additional reporting by Jan Lopatka; Editing by Michael Winfrey and Catherine Evans)