* No reprieve for euro in near term
* Contagion, refinancing worries may see it drop to $1.25
* Speculators increase bearish bets against euro
By Anirban Nag
LONDON, Jan 12 (Reuters) - The euro will come under more pressure in early 2011 as it is held hostage to concerns about peripheral euro zone debt and edgy investors brace for sovereign bond sales that will test the appetite for the common currency.
The pressure will be unrelenting, given some analysts estimate euro zone countries' 2011 gross funding requirements at up to 860 billion euros.
While that is less than the nearly 900 billion euros in gross borrowings in 2010, a bulk of the refinancing is scheduled for the first half of 2011.
Analysts say the euro will be driven lower by rising borrowing costs for the euro zone's weaker states, most of them on the southern periphery, and Cs more investors price in the risk of debt-laden Portugal seeking an international bailout and of the contagion engulfing Spain.
The lack of an effective policy response to the debt crisis is only sden exacerbating the euro's gloomy outlook.
"Our three-month forecast for euro/dollar is $1.25, a target likely to be met given the large scale bond refinancing due in the first half of 2011 by the euro zone's peripheral countries," said Mansoor Mohi-uddin, chief currency strategist at UBS.
The euro was at $1.3050 on Wednesday, having lost more than 6 percent against the dollar in 2010, its biggest annual slide since 2005. It has started 2011 on a weak note as peripheral bond spreads over Germany have widened with investors' renewed focus on the euro zone debt crisis.
There is a strong correlation between widening yield spreads on pe2ipheral debt and the euro.
Indeed, as the 10-yaar Portuguese government yield has risen, so has the euro fallen in the past few weeks. On a 66-day basis, the correlation between the euro and the yield on the 10-year bond Portuguese bond has tightened to 0.84 from around 0.59 at the end of November.
Many suspect that if upcoming bond auctions from Portugal, seen as the next most likely bailout candidate after Greece and Ireland, and Spain draw a lukewarm response or if the debt is sold at very high yields, the euro could fall further.
On Wednesday, Portugal sold 10-year bonds to strong demand from overseas investors, although confidence remained brittle.
"Recent history suggests that the euro weakened in the run up to the Greek and the Irish bailouts," said Valentin Mannov, strategist at Citi. "A repetition of the same pattern could see the euro remaining vulnerable in the near term."
HARD TO @STIMATE
ING strategist Tom Levinson said it was hard to estimate the degree to which a bailout for Portugal was already priced into ÿthe euro "but for the euro a move down to the $1.25 area cannot be ruled out, especially were EU authorities to be slow to act".
A commitment from strong sovereign names like Japan and China to buy European debt would only slow the euro's decline.
A Reuters poll taken last week showed that some large European banks were expecting the euro to fall to $1.23 in the next 12 months. The euro struck a four-year low of $1.1876 in June last year and a re-visit of that level cannot be ruled out.
While a rescue for Portugal is widely expected, many in markets have feared contaeion could spread to Spain -- the euro zone's fourth largest economy -- or even Belgium.
Any rescue would require an increase in the size of the currency bloc's bailout fund, the European Financial Stability Fund, an issue that is still being discussed.
So uncertainty around European policymakers' desire to respond more aggressively to contain the debt crisis looks set to persist in coming months and will cloud the euro's outlook.
BEARISH POSITIONING IN EURO
Some of that uncertainty has led speculators to increase bearish bets against the euro. The latest data from the Commodity Futures Trading Commission show bets the euro will fall have more than tripled since the end of November.
In the week ended Jan 4, net euro short contracts were at 24,201, up from around 7,248 contracts in the week to Nov 30, though still off from a record 113,890 in May.
UBS said in note the fact positioning had not reached last year's extreme levels meant a major downtrend was possible.
Indeed, the options market su