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FOREX-Euro falls as Spain bank bailout stokes debt fears

* Euro slips after last week’s short-covering rally

* Spain’s CajaSur takeover keeps investors jittery

* CFTC: IMM speculators trim record short euro positions

* April U.S. existing home sales rise, boosting dollar (Adds comment, updates prices, changes byline)

By Wanfeng Zhou

NEW YORK, May 24 (Reuters) - The euro fell broadly on Monday, retreating from last week’s gains, as the Spanish central bank’s takeover of a small savings bank added to worries about economic growth in the euro zone.

The Bank of Spain on Saturday said it had taken over CajaSur following the failure of its planned merger with another regional lender. For more, see [ID:nLDE64L007]

Although a relatively small bank, analysts said the bailout highlighted weakness in the European banking sector and fueled worries other savings banks could require money at a time when Spain is trying to slash government spending and repair public finances.

It is “a sign that sovereign debt risk is spreading from the public to the private sector,” said Dan Cook, a senior market analyst at IG Markets Inc in Chicago.

“This move further highlights the risk to, and weakness in, the European banking sector. The liquidity issues faced by financial firms in many areas in Europe by itself would be enough to slow growth prospects across the region,” he added.

In afternoon New York trading, the euro EUR= was down 1.3 percent on the day at $1.2404. It fell 0.8 percent versus the yen EURJPY=R to 112.23.

Traders said the euro’s losses accelerated after stop-loss orders were triggered under $1.2480. European banks and Asian central banks were also seen selling the euro in quiet trade, with many European markets closed for a holiday.

Support is seen around $1.2135, the 50 percent retracement from the euro’s all-time low to its all-time high. Last week, the euro fell to a four-year low of $1.2143 before recovering.

“The Spanish news is not really a big story, but it does highlight that there are a lot of cracks in the financial system,” said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto. “The concern is that if these cracks get bigger, the question is, ‘Who would be able to contain it?”

SHORT-COVERING STALLS

The euro has retreated from around $1.2670 hit on Friday. It rallied last week as investors exited short positions in the single currency, partly on speculation its dramatic decline in recent weeks may prompt central banks to intervene to prop up the currency.

Commodities Futures Trading Commission data shows IMM speculators had by early last week cut back slightly on record bets the single European currency will weaken. [IMM/FX] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For the chart on the latest data on euro positioning, clickhere ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Those positions have ballooned in past months, pushing the euro lower against the backdrop of Greece’s debt crisis, which has threatened to spread to Spain and Portugal and raised concerns about the euro’s stability.

“The euro is lower against every major currency as last week’s short covering rally has clearly ceased,” said Andrew Busch, global FX strategist at BMO Capital Markets in Chicago. “It feels like a 1.2200-1.2700 range is what we’re going to experience through the U.S. release” of nonfarm payrolls data in early June, he added.

Data that showed U.S. existing home sales rose more than expected in April briefly pushed the euro to session lows against the dollar around $1.2345, according to EBS data. See [ID:nN24249105]

Liquidity has dried up, leaving investors scrambling for safe-haven dollars. This helped to boost the dollar roughly 1 percent higher against a currency basket .DXY.

Against the yen, the dollar rose 0.6 percent to 90.49 JPY=, while sterling was down 0.1 percent at $1.4447 GBP= (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Padraic Cassidy)

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