FOREX-Euro drops on Greek rescue deal impasse

* Euro drops, gathers pace after triggering stops

* Risk reversals show high demand for euro put options

* FOMC meeting this week unlikely to support dollar

By Anirban Nag and Jessica Mortimer

LONDON, June 20 (Reuters) - The euro fell on Monday, trading close to recent lows as a delay to the next tranche of Greek bailout funds undermined confidence in the single currency, with the options market and technical charts pointing to more losses.

Euro zone finance ministers said they expected 12 billion euros in emergency loans to Greece to be paid by mid-July, but the disbursement would depend on the Greek parliament first approving new austerity measures. [ID:nLDE75I0FM]

Traders and analysts said uncertainty over the Greek crisis left investors inclined to sell the euro on any rallies.

"There is still very little confidence out there and too much political risk and it is quite likely the market is looking for the downside in euro/dollar," said Lena Komileva, global head of G10 currency strategy at Brown Brothers Harriman.

However, she said for now markets believed euro zone countries would reach an agreement that would keep the Greek crisis temporarily contained and she expected this would hold the euro in a range between $1.40 and $1.45.

The euro was down 0.7 percent against the dollar at $1.4214, in sight of a three-week low of $1.4073 hit on Thursday on trading platform EBS. A move below there would target the 200-week moving average around $1.4015.

The euro's losses picked up steam earlier in the session after stop-loss offers were triggered near $1.4250. However, it came off a session low of $1.4191 on a bout of short covering.

Traders said large options expiries at $1.4200 reportedly due on Monday could keep the euro hovering around that level.

"At the moment we are still in limbo - the European Union and European Central Bank appear to have reached a compromise on private sector involvement in the Greek bailout, but are still demanding austerity measures which are unacceptable to some in Greece," said Kit Juckes, currency strategist at Societe Generale.

"(The euro's) failure to hold above $1.43 last week threatens a fresh downside test."

Below the psychological $1.4000 level, the next target would be the May 23 low of $1.3968.

Market players said they expected European authorities to ultimately extend the emergency loans that Greece needs by mid-July to avoid defaulting on its debt.

Still, the current impasse and bickering between policymakers has driven up the cost of insuring Greek debt against default and increased the risk of investors losing confidence in other vulnerable euro zone debtors.

Italian credit default swaps spiked higher after Moody's placed the country on a review for downgrade late on Friday, citing concerns over increased borrowing costs stemming from the Greek crisis and structural impediments to growth.[GVD/EUR]

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Markets will now watch the result of a vote of confidence the newly reshuffled Greek cabinet faces on Tuesday.[ID:nLDE66D1JB]

MORE DOWNSIDE RISKS

Risk reversals on euro/dollar options, which show strong demand for bets on the euro falling compared to bets on it rising, demonstrated the negative view investors have on the shared currency.

One-month risk reversals were trading around 2.7 percent in favour of euro puts, hovering near their highest level since the euro zone's debt problems reached crisis point in May-June 2010, according to data from interdealer broker ICAP.

One factor that may lend support to the euro in the near term, however, is a U.S. Federal Reserve policy meeting later this week, traders said.

The Fed is expected to restate its commitment to hold interest rates near zero for an extended period amid fresh signs the U.S. recovery has lost momentum. It is likely to continue to reinvest proceeds from maturing bonds it holds to make sure its balance sheet does not shrink. [ID:nN14191675]

"The focus is on how concerned the Fed is over recent soft U.S. data and whether it is considered just a temporary blip," said Tom Levinson, currency strategist at ING.

On Monday, investors preferred to buy the dollar as euro zone debt worries and concerns about a global slowdown encouraged flight to safe-haven assets, with the Swiss franc and the yen also benefiting.

High-yielding currencies fell sharply, with the Australian dollar AUD=D4 losing more than 1 percent to $1.0496. The New Zealand dollar NZD=D4 was also down 0.9 percent at $0.8052.

The dollar index <.DXY>, which tracks the greenback's performance against a basket of major currencies, was up 0.5 percent at 75.39. The dollar was up 0.2 percent against the yen at 80.22 yen with traders citing talk of exporter selling interest above 80.50 yen. (Editing by Stephen Nisbet)