* Italian spreads widen, put euro under pressure * Euro bids seen around $1.3660, options suggest more weakness * Franc slides on Swiss deflation; SNB ready to weaken further By William James LONDON, Nov 7 (Reuters) - The euro fell on Monday as the focus of the region's debt crisis shifted to Italy, with a short-term rebound on speculation Prime Minister Silvio Belusconi could resign reversing when the talk was denied. The safe-haven Swiss franc tumbled against the euro and the dollar after the Swiss National Bank chairman suggested the franc was still overvalued against the single currency, reviving speculation the SNB may raise the 1.20 franc floor on the euro/Swiss exchange rate. . Analysts said the franc's recent gains had been driven mainly by euro zone developments, and Swiss policymakers would take that into account before deciding whether to raise the floor. But with data showing deflation in October, the SNB had room to take more measures to weaken the franc. . Investors shifted their focus from Greece's attempts to get its bailout programme back on track to the region's third largest economy, Italy, where Berlusconi was fighting for his political future. The euro stood at $1.3755, down 0.3 percent on the day, having recovered from a session low of $1.36818 on reports that Berlusconi may resign that also boosted Italian bond and stock markets. A senior party source said Berlusconi had dismissed the rumours. "A new government, or another leader could probably have more support from the parliament and bring more reforms," said Marcus Hettinger, global FX strategist at Credit Suisse. "(But)from the currency side I don't see why that would have a long-lasting positive effect. Growth is basically what is needed everywhere to reduce deficits." Traders cited talk of momentum stops at $1.3670/80 with bids said to be lurking around $1.3660. The Italian 10-year government bond yield hit its widest since 1997 on Monday, a day before Berlusconi faces a parliamentary vote with rebels threatening to bring down his government over its failure to adopt structural reforms. In a sign that markets already see more problems for the euro, option traders said there was some interest in longer-dated euro put options. In addition, one-month risk reversals were still not far from a record high in favour of bets on euro falls versus the dollar. ITALIAN CLIFFHANGER Greece's main political parties clinched a deal to run a coalition government, but any relief impact on the euro or other assets was fleeting, with Italy the next potential flashpoint. A debt meltdown in Italy would pose a far graver risk to the 17-nation currency bloc than Greece. With Rome's borrowing costs soaring and 1.9 trillion euros in public debt, it is too large to bail out. Morgan Stanley strategists said in a trading recommendation they expect a renewed move down in the euro, targeting the $1.3365 area and then the $1.3100 area last seen at the beginning of October. They lowered their recommended entry level for euro/dollar shorts to $1.3760. Weak economic data on Monday soured the near-term outlook for the euro. German industrial output fell by an above-forecast 2.7 percent, adding to signs that Europe's biggest economy was slowing. Swiss prices fell for the first time in two years in October, boosting the case for policymakers to act again and curtail the franc's gains. "The CPI numbers will add pressure on the SNB to back up its words and the markets are aware of that," said Jeremy Stretch head of currency strategy at CIBC World Markets The euro was last up 1.1 percent on the day at 1.2333 francs . The dollar gained more than 1.7 percent on the day at 0.8976 francs , rising to 0.90310 on EBS. Societe Generale said in a note demand for short-dated topside strikes in the euro/Swiss franc pair was driving 1-month risk reversals for euro calls higher , suggesting a greater skew towards franc weakness. The dollar index was up 0.1 percent at 77.038. Against the yen, the dollar was a tad lower at 78.05 yen with bids cited around 78 yen.