* Euro off 2-month low but struggles to hold above $1.40
* Euro helped by stabilizing German business sentiment
* Euro zone debt crisis casts cloud over currency (Adds quote, detail, updates prices)
By Wanfeng Zhou
NEW YORK, May 24 (Reuters) - The euro edged up from a two-month low against the dollar on Tuesday lifted by better-than-expected German data but gains could be short-lived given nagging fears about Europe's spreading debt crisis.
German business sentiment held steady in May, the Ifo think tank said, confounding expectations for a third consecutive monthly fall. The data pushed the euro back above $1.4100 EUR=, away from Monday's two-month low of $1.3968. For more see [ID:nLDE74N0T6].
Although the euro was holding above $1.4000, analysts said it was vulnerable to a break lower. Worries that Greece may have to restructure its debt and fears of contagion to bigger economies like Spain and Italy have hit the euro hard lately, pushing the currency down more than 5 percent since early May.
"The problem still remains in the peripheral markets," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. "Global portfolio managers remain net sellers of peripheral euro zone debt instruments such as Greece, Portugal, Italy and Spain."
The euro last traded at $1.4108, up 0.4 percent on the day, after rising to $1.41338 on trading platform EBS EUR=EBS.
It earlier pared gains after the leader of Greece's conservative political opposition rejected the government's new package of fiscal measures to slash deficits. [ID:nATH006097]
Greece will not be able to honor its obligations if it does not get the next tranche of a bailout loan and the IMF has made clear it cannot disburse the money if Greece's 2012 EU funding is not assured, the country's finance minister said on Monday. [ID:nLDE74M21J]
Greece faces a 13.4 billion euro ($18.85 billion) funding crunch next month.
Any Greek debt restructuring plan would open the door to euro selling towards $1.30, analysts said, by hitting European banks and private investors and raising questions about the euro zone's overall credit-worthiness. [ID:nLDE74N0U1]
Traders reported stop-loss orders from $1.4125, with more around Monday's high of $1.4146. Support is seen around the 100-day moving average at around $1.3975. The euro has traded above its 100-day average since February.
Against the yen, the dollar rose 0.2 percent to 82.13 yen JPY=. The U.S. dollar index, which measures the greenback versus a basket of currencies, slipped 0.2 percent to 75.913 .DXY, near a seven-week high set on Monday.
A Greek debt default would hurt other peripheral euro zone states and could push Portugal and Ireland into junk territory, Moody's said on Tuesday, warning it would classify most forms of restructuring as a default. [ID:nLDE74N0AQ]
Fears of contagion mounted after ratings agencies downwardly revised outlooks for Italy and Belgium, while Spain's ruling Socialist Party lost in regional elections, raising doubts about Madrid's commitment to fiscal austerity.
"(Spain's) proposed budget cuts had kept the region's fourth-largest economy off the debt crisis radar until now," said James Percival, market strategist at Western Union Business Solutions in Victoria, British Columbia.
"Traders now fear this is a sign of things to come, as a national-level electoral turnaround that undoes the austerity measures in Spain, or an outright rating cut in Italy, threatens to bring about a crisis in a country too big to be rescued."
Spain has come under intense market scrutiny in recent days, though it sold 2.3 billion euros of short-term debt easily on Tuesday with borrowing costs largely unmoved from the last auction.
The New Zealand dollar gained more than 1 percent to $0.8017 NZD=D4 after a quarterly survey on behalf of the Reserve Bank of New Zealand showed inflation expectations in the country rose in the second quarter. [ID:nL3E7GO06Y]
The Australian dollar was up 0.5 percent to $1.0557 AUD=D4, off a one-month low of $1.0478 hit on Monday. (Editing by James Dalgleish)