* Italy bond auction could signal euro direction * Bernanke's testimony curbs dollar demand By Lisa Twaronite and Ian Chua TOKYO, Feb 27 (Reuters) - The yen held onto its edge against its major counterparts in Asian trading on Wednesday as investors awaited an Italian bond auction later in the session which could give clues on the direction of the euro. Italy's borrowing costs have soared on the back of a political stalemate following its recent election, creating a challenging environment for the country's sale of new 10-year bonds and five-year paper. Markets are already uneasy after the election produced no clear winner and the single currency could lose ground again if Italy is forced to pay far higher borrowing costs than before the polls. The dollar was at 91.90 yen, down about 0.1 percent from North American trading on Tuesday but still managing to hold above a one-month low of 90.85 touched on Monday. The euro stood at 120.05, down about 0.1 percent but above Monday's one-month low of 118.74 yen. The euro struck a 34-month high of 127.71 yen on Feb. 6, and the dollar hit a 33-month high of 94.77 yen on Monday. "The overall trend of yen weakness might still be intact, but there is a perception in the market that Monday's move was overdone," aid Marito Ueda, director at FX Prime Corp. in Tokyo. The Japanese currency was caught between investors seeking to book profits on bearish positions and those building new short positions at these levels, market participants said. The yen has been the worst performing major currency so far this year as investors bet on more aggressive policies from the Bank of Japan to whip deflation, and investors have positioned for more monetary stimulus. This week's sharp yen gains sparked by fears of political deadlock in Italy were a wake-up call to investors and a challenge to Prime Minister Shinzo Abe. BERNANKE SOOTHES JANGLED NERVES Comments from Federal Reserve Chairman Ben Bernanke on Tuesday helped alleviate some market concerns about an early end to the Fed's bond buying programme, which also somewhat cooled demand for the greenback. The renewed market angst about the euro zone saw investors quickly switch focus to the euro from the yen. The euro plumbed a seven-week trough of $1.3017 on the EBS trading platform on Tuesday. It last traded at $1.3065, nearly flat from Tuesday's late U.S. levels. The common currency has shed about 5 percent since peaking at a 15-month high of $1.3711 on Feb. 1. "It seems likely that the stop of 1.2980 on our long EURUSD recommendation (from 1.3180 established last week) is at risk," said BNP Paribas strategist Vassili Serebriakov. "However we do not believe this is the start of the next round of a Europe-wide debt crisis, given that Italy's overall fiscal position is relatively stable and that investors do not appear to be overweight European assets, which should limit the impact of any unwind." Renewed European concerns also took a toll on commodity currencies. The Australian dollar was slightly lower at $1.022, after it fell to four-month low of $1.0198 on Tuesday but did not sustain a break of $1.0200. A clean break below that level would bring into focus the October low of $1.0149.