FOREX-Debt crisis sends euro below $1.40, more losses seen

* Euro hits 2-month low of $1.3968, record low vs franc

* Negative news on Greece, Spain, Italy weighs

* U.S. economic outlook could limit euro downside (Updates prices; adds comment, details, changes byline)

By Wanfeng Zhou and Steven C. Johnson

NEW YORK, May 23 (Reuters) - Fear Europe's debt crisis was spreading sent the euro to a two-month trough against the dollar and a record low against the Swiss franc on Monday, and traders said the currency's decline may not be over yet.

Markets worried about Spain's commitment to fiscal austerity after the ruling Socialist Party lost in regional elections. Italy suffered a credit outlook downgrade. For details, see [ID:nLDE74L02S] and [ID:nLDE74L0K5]

That added to worries about Greece. Even with its government pledging to speed up privatization of state firms, investors worry it may yet have to restructure debt. [ID:nLDE74M0F4]

Traders responded by pushing the euro through important support at $1.40, and analyst said selling should continue this week, provided U.S. economic does not disappoint investors.

"We have a confluence of negative events....All of that is compounding to create this toxic mix for the euro." said Mark McCormick, currency strategist at Brown Brothers Harriman.

The euro fell as low as $1.3968 , its weakest showing since mid-March, after breaking below $1.40, a key psychological level and roughly its 200-week moving average.

It bounced back to $1.4030, partly helped by bids from Asian central banks, but remained down 0.9 percent on the day.

The euro fell to 1.2323 Swiss francs , its lowest since the euro zone single currency was launched in 1999. Selling accelerated after stop-loss orders were triggered below 1.24, while an option barrier was taken out at 1.2350.

It was also down 0.8 percent at 114.81 yen . The dollar edged up 0.1 percent to 81.79 yen .

Euro selling pressure grew after spreads on benchmark Spanish, Italian and Greek government bonds widened against German benchmarks as investors dumped the bonds of weaker euro zone countries in favor of safer German debt. [GVD/EUR] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ TOP NEWS-Euro zone Debt Crisis [nTOPEURO] FX COLUMN-Euro breakdown paves way to $1.35 [ID:nL3E7GN0H4] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

OPTIONS SIGNAL DOWNSIDE

Weaker economic data added to the euro's woes as German and euro zone purchasing managers' indexes for May fell more than expected. [ID:nSLAKGE7U5] and [ID:nSLAKGE7U4]

The options market suggested the risks for the euro were more towards the downside. Euro/dollar one-month implied volatility jumped to 13.1 percent from 11.70 percent Friday, suggesting trading may get more erratic if euro selling continues.

One-month euro/dollar risk reversals rose to 1.8 from 1.45 in favor of euro puts. The rising premium to protect against more euro losses suggests more selling ahead.

Brad Bechtel, managing director of Faros Trading, said the euro/dollar is likely trading at the bottom of a new range and the consolidation could continue in coming weeks with "plenty of nasty head fakes" in both directions.

"Keep your seatbelt fastened for now and expect short-term choppiness on any new risk positions," he said.

The dollar was a big beneficiary of euro weakness, hitting a seven-week high of 76.366 <.DXY> against a currency basket.

But dollar gains could be brief if concerns about the U.S. fiscal deficit and patchy economic data resurface. U.S. durable goods, housing and GDP data are due this week.

"It's possible that people will be reminded that the Fed is going to remain on hold and the European Central Bank is probably going to hike in July. Maybe we can form a base around $1.39 and push the euro back up," said BBH's McCormick. (Additional reporting by Naomi Tajitsu in London; Editing by Andrew Hay)