* Euro weak near 3-month low vs dollar on Cyprus problems * Investors await vote on Cyprus bailout deal * Little impact from better-than-expected German ZEW By Gertrude Chavez-Dreyfuss NEW YORK, March 19 (Reuters) - The euro edged lower for a second straight session against the dollar on Tuesday as investors nervously awaited a vote in Cyprus on a controversial bank deposit levy that renewed fears about euro zone instability. A Cyprus government spokesman said a plan to levy taxes on bank deposits, crucial for the country to secure financial aid, was unlikely to be approved by parliament on Tuesday. The House of Representatives was expected to meet at 1600 GMT. Rejection of the measure would push the island closer to a default and a banking collapse that could have repercussions across the euro zone. It could also inject fresh volatility into financial markets and weigh on the euro. Safe-haven German bund were higher on Tuesday while European stocks fell. "The uncertain outlook for Cyprus carries potential negative knock-on effects for other euro zone nations which should keep near-term pressure on the single currency," said Joe Manimbo, senior market strategist at Western Union Business Solutions in Washington. The single currency slipped 0.1 percent against the dollar to $1.2940, holding within sight of Monday's three-month low of $1.2882. Below that, support was expected around the 200-day moving average at $1.2874. The euro briefly gained after a slightly better-than-expected German ZEW economic sentiment survey, but demand was hampered by worries about Cyprus. Still, there were some market participants who remained hopeful. "The fact that we failed to break below support at $1.2880 is good sign," said Sebastien Galy, currency strategist, at Societe Generale in new York. "It looks to me that there is limited contagion at this point in time if you look at the bond market." Even though German bunds were higher, Spanish and Italian bonds were little changed on the day. Spanish 10-year yields were flat at 5.0 percent, while their Italian equivalents were 3 basis points higher at 4.66 percent. Some analysts said the market remains insulated by the European Central Bank's as-yet untested bond-buying promise. Against sterling, which is currently being bought as a shelter in times of heightened uncertainty in the euro zone, the euro hovered near a five-week low of 85.32 pence hit on Monday to change hands at 85.64 on Tuesday. The euro also retreated against the Swiss franc, dropping 0.3 percent on the day to 1.2214 francs. UPHILL TASK Analysts said the unprecedented plan to impose taxes on citizens' savings in Cyprus, announced over the weekend, had rattled savers in larger European countries also burdened by heavy debts, like Spain and Italy. As a result, the more liquid dollar and the Japanese yen, often sought during times of financial instability and economic stress, should remain supported. UBS strategist Geoffrey Yu, however, said the euro looked vulnerable but losses should be capped as long as investors did not start withdrawing funds from other euro zone countries, or rush to empty cash machines as they have done in Cyprus. "We are not seeing huge queues at ATMs (cash machines) in Italy and Spain ... that contagion is contained. We have revised our one-month forecast in euro/dollar to $1.30," he said. The dollar index, which measures the greenback against a basket of currencies, was flat on the day at 82.710. The dollar was up 0.1 percent on the day at 95.31 yen with the Japanese currency likely to be driven by any comments from incoming governor of the Bank of Japan Haruhiko Kuroda, who assumes the post on Wednesday. Expectations are huge for Kuroda to put in place an aggressive monetary policy to try and lift Japan out of deflation and which is likely to weaken the yen. Market players said if the situation deteriorates in Cyprus the safe-haven yen could regain ground, pushing the dollar further away from last week's 3-1/2 year high of 96.71 yen. Meanwhile, the U.S. economy continued to show outperformance on Tuesday, with housing starts rising last month and new permits for construction climbing to their highest in more than four years. The report did help boost the dollar against the yen.