* Euro off lows despite uncertainty about Italy's politics
* Fed to kick off two-day policy meeting Tuesday
* Investors expect more stimulus from the Fed
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, Dec 11 The euro stabilised near two-week lows on Tuesday as nerves calmed over Italy's latest political turmoil and as prospects of more stimulus from the Federal Reserve pinned down the dollar.
The common currency stood at $1.2938,, flat from late U.S. levels but above a low of around $1.2880 plumbed on Monday.
It has risen some 0.5 percent from Friday's two-week trough around $1.2876. Immediate resistance is seen at $1.2973, a level representing the 38.2 percent retracement of its Dec. 5-7 fall.
The euro found some support after Italian Prime Minister Mario Monti played down market fears over his decision to resign, saying there was no danger of a vacuum ahead of an election in the spring.
"The euro's dip below $1.2900 proved to be short-lived," said Vassili Serebriakov, strategist at BNP Paribas. "FX markets are showing some notable resilience following news of Monti's imminent resignation."
Monti's move came after former prime minister Silvio Berlusconi abruptly withdrew support for Monti's technocrat government, accusing Monti's reform and austerity steps of dragging Italy "to the brink of a precipice."
"There's no doubt Monti's resignation raised some concerns but it's not like Berlusconi has strong public support," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.
Although Italian bond and shares were hit by the news, that did not lead to rise-averse sentiment in broader financial markets, partly on the view that debt buying programme by the European Central Bank could curb selling in Italian debt, should their yields keep rising.
Another factor keeping the euro off its lows was a reluctance by investors to aggressively buy the dollar, given expectations the Fed will replace its expiring 'Operation Twist' programme with another Treasury bond-buying plan at its Dec. 11-12 policy meeting.
Many economists believe the U.S. central bank will announce monthly bond purchases of $45 billion, although some think it could surprise with a bigger amount to press borrowing costs lower. Such an outcome could see the greenback come under further pressure.
The dollar index slipped 0.1 percent to 80.311, retreating from at two-week high of 80.658 set on Monday.
The dollar was buying 82.37 yen, still not far from an eight-month peak of 82.84 set last month, though selling related to hedging for option triggers at 83 yen is likely to cap the dollar.
The prospect of fresh stimulus from the Fed and growing expectations the Bank of Japan could expand its asset-buying and lending programme at a meeting next week kept high-yielding currencies well bid, despite worries that bullish positions were already stretched.
The New Zealand dollar held near ten-week high hit on Monday, fetching $0.8351, just shy of Monday's high of $0.8355 and flat from late U.S. levels.
The Australian dollar dipped, however, following a surprise plunge in Australia's business confidence.
The Aussie slipped 0.15 percent to $1.0472, though it is still comfortably within reach of an 11-week high of $1.0515 set last week.
There is no major economic data out of Asia on Tuesday. In Europe, the focus is likely to be on the monthly German analyst and investor sentiment survey from the Mannheim-based ZEW think tank.