* Euro hits decade low vs yen, then recovers in thin trade * Euro stays under $1.30 vs USD, more falls expected * But substantial short euro positions could limit losses By Jessica Mortimer and Neal Armstrong LONDON, Jan 2 (Reuters) - The euro fell to a decade low versus the Japanese yen on Monday with more falls expected as concerns about the financing needs of highly indebted euro zone countries plagued the shared currency into the new calendar year. The euro fell as low as 98.71 yen on the EBS trading platform in early Asian trade, its lowest since late 2000, extending falls on Friday when it broke below 100 yen to finish the year down around 8 percent. It recovered to trade flat for the day at 99.60 yen in Europe, with liquidity thin because most Asian markets as well as the UK and U.S. were closed for New Year holidays. Versus the dollar, the euro was steady at $1.2947, less than a cent above its 2011 low of $1.2858 hit last week. Worries about high sovereign debt levels and a lack of policy solutions to the region's 2-year-old debt crisis were expected to push the euro lower in the coming weeks and months. However, the slide may be limited by periodic short-covering rallies as investors trim hefty bets against the currency, with Commodity Futures Trading Commission data on Friday showing short euro positions swelled to a record high in the latest week. "There's still a lot of pressure on the euro due to concerns about the refinancing needs of some euro zone countries in the first quarter," said Arne Lohmann Rasmussen, head of currency research at Danske Bank in Copenhagen. "This is driving many to safer assets and currencies, like the Japanese yen." However, he said the substantial number of short euro positions could limit the euro's falls, potentially enabling it to rebound back above $1.30 versus the dollar, especially if U.S. ISM and jobs data this week point to an improving U.S. economy. Nevertheless, in the absence of a comprehensive European policy response to the debt crisis, the euro could test its 2010 low of $1.1876 this year, some traders said, while support was highlighted around $1.2600, the 76.4 percent retracement of the euro's 2010-2011 rally. Policymakers marked the 10th anniversary on Sunday of the introduction of euro notes and coins by urging governments to save and consolidate to overcome their debt crises, while warning 2012 would be harder than 2011. Concerns about the massive task facing European leaders as they struggle to contain the region's debt crisis were highlighted as Spain's new government warned last week its 2011 budget deficit would be larger than expected. A deteriorating euro zone economy will also worry investors, with many anticipating a recession in the region. A survey on Monday showed euro zone manufacturing activity declined for a fifth consecutive month in December. "We believe that the generally dire euro zone purchasing manufacturers surveys provide significant support to the case for the ECB to cut interest rates again in the early months of 2012, especially as they show essentially muted inflationary pressures," said Howard Archer, chief UK and Europe economist at IHS Global Insight. DEBT AUCTIONS EYED Italy, the euro zone's third-largest economy, remains at the centre of the debt crisis, and its borrowing needs could overwhelm the bloc's financial defences if it were forced to seek an international bailout. In the coming months, nervous investors will focus intently on demand at auctions of euro zone bonds. "We remain a sell on rallies (with the euro) as we tend to think the euro zone crisis will actually get worse before it gets better," Kathleen Brooks, research director at FOREX.com in a note to clients. The euro's troubles have benefited the dollar and yen, both of which tend to attract safe-haven flows in times of trouble. Against a basket of major currencies, the dollar was up 0.1 percent at 80.260, having hit a near one-year high of 80.854 last week. The dollar fell to a one-month low against the yen of around 76.30 yen before steadying at 76.90.