* Euro holds above 3-1/2 month low versus dollar
* Slight respite in Spain, Greek worries gives support but euro vulnerable
* Australian dollar recovers from 5-month lows on better jobs data
By Neal Armstrong
LONDON, May 10 (Reuters) - The euro steadied near a 3 1/2-month low against the dollar on Thursday as stress in Spanish debt markets abated slightly and after Greece secured funds needed for bond repayments, tempering the threat of a Greek insolvency and possible euro exit.
However Greece’s future in the euro zone remains in question, with another round of elections foreseen and doubts about whether the country will adhere to austerity measures needed to secure further emergency funding.
Greece averted an imminent funding crisis after the board of the European Financial Stability Facility agreed to release 4.2 billion euros of a scheduled payment. However, impatient governments withheld part of the latest tranche of rescue funds to be paid on Thursday.
Ten-year Spanish government bond yields fell after Spain’s government effectively took over Bankia, one of the country’s biggest banks, in a bid to restore confidence in a sector laden with bad debts.
The euro hit its lowest since late January on Wednesday of $1.29115, but held its ground to stand flat for the day at $1.2935. Analysts were sceptical over its ability to recover after it broke below the $1.2950 level the previous day.
“We’re entering a new chapter of concern for the euro zone and it’s not one that can be resolved in the near future,” said Tom Levinson, currency strategist at ING, who expected sellers to stamp out any short-covering rallies in the common currency.
Traders said next possible support for the euro was around $1.2819, the 76.4 percent Fibonacci retracement of its 2012 rally, with the year’s low around $1.2624 then coming into play.
“We had a range break in the euro yesterday and this just feels like a small pause today,” said Daragh Maher, currency strategist at HSBC.
“It doesn’t feel like there’s much appetite to take the euro higher, just that we’ve just curtailed some of the trauma on the downside,” he added.
Greek Leftist leader Alexis Tsipras gave up his attempt to form a new government on Wednesday, putting Greek Socialist leader Evangelos Venizelos in a position to make a last-ditch attempt to form a government on Thursday.
But chances of any deal on a coalition government looked slim after two failed attempts, making new elections in three to four weeks the most likely outcome.
With Athens at risk of running out of cash in June, a rerun of elections could be a make-or-break event for Greece as international lenders decline to renegotiate the terms of the bailout as Greek voters wanted.
Market players also said the market was positioned heavily short of the euro, which would help to slow the pace of further declines.
Against the yen, the euro was flat at 103.04 yen, above a three-month low of 102.76 yen touched on Wednesday.
With the latest troubles in the euro zone adding to concerns about tepid growth in the United States and China, the low-yielding yen was expected to stay supported.
The yen, which tends to outperform at times of economic stress because of Japan’s net creditor position, has recovered most of the losses that followed the Bank of Japan’s easing in February.
The U.S. dollar stood at 79.62 yen, having hit its lowest in nearly three months, at 79.428 per dollar, on Wednesday.
The Australian dollar recovered from a five-month low of $1.0021 hit on Wednesday after upbeat Australian job data reduced expectations that the Reserve Bank of Australia could follow up this month’s 50 basis point rate cut with more easing in coming months.
The Aussie last stood at $1.0085, a gain of 0.5 percent on the day.