FOREX-Euro erases gains as Ireland optimism fades

* Euro sheds early gains versus dollar

* Ireland requests aid; peripheral worries remain

* Moody's says multi-notch Ireland downgrade likely

(Adds quote, detail)

By Jessica Mortimer

LONDON, Nov 22 (Reuters) - The euro erased gains on Monday as a brief flurry of optimism after Ireland sought a bailout faded, with concerns about possible contagion to other highly indebted euro zone states keeping investors wary.

Many were worried the European/IMF rescue package might not be effective in the long term and that it would not stop markets from targeting fellow straggler Portugal. [ID:nLDE6AL00M] [ID:nLDE6AL04W]

"The market is split between those who think the deal reduces the risks going into the year-end and those who think the fact that Ireland followed Greece (in requesting a bailout) in relatively short succession is a euro negative," said Paul Robson, currency strategist at RBS.

Rating agency Moody's said a "multi-notch downgrade" on Ireland was now likely [ID:nLDE6AL0ZA].

Political instability was also a concern as Ireland's Green party, the junior coalition partner in the government, said a general election should be held in January. [ID:nWLA8721]

The euro was down 0.1 percent against the dollar at $1.3661 , more than a cent off an earlier one-week high of $1.3786, when it pierced the 38.2 percent retracement of its Nov 4-18 fall at $1.3765.

Analysts said a sustained break of $1.3765 would be needed for a further correction towards resistance at $1.3864, a 50 percent retracement of that November sell-off.

"The market is sceptical as there are still fiscal issues with Portugal and Spain. Investors have been undecided on the euro for a while now and I can see that uncertainty lasting into year-end," said Jane Foley, senior currency strategist at Rabobank.

EURO LONGS REDUCED

Data from the U.S. Commodity Futures Trading Commission showed on Friday highlighted uncertainty as speculators more than halved net euro/dollar long positions to 8,606 contracts last week from 23,283 the week before. [ID:nN19210329]
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Euro zone debt struggle: http://r.reuters.com/hyb65p

Multimedia on euro zone crisis http://r.reuters.com/hus75h

The size of European Union and International Monetary Fund aid for Ireland has yet to be decided but is likely to be smaller than Greece's 110 billion euro bailout last May. A senior EU source said it could total 80 to 90 billion euros.

The single currency also cut gains against the yen to trade flat at 114.12 yen , while the U.S. dollar index <=USD> <.DXY> was steady at 78.482.

Dealers said trade was thin partly due to a Japanese market holiday on Tuesday and a U.S. market holiday on Thursday.

The greenback was up slightly versus the yen at 83.50 yen , with its surprise rebound this month from a 15-year low of 80.21 keeping many traders positive in the near term.

Technically, the attention is on whether the dollar can rise sustainably above its daily Ichimoku cloud, now at 83.64. But traders said options expiries on Monday, reportedly at 83.00, 83.15, 83.25 and 83.50 yen, may keep it hemmed in a tight range.

AUSSIE OUTPERFORMS

The Australian dollar outperformed, rising 0.2 percent to $0.9878, with an initial improvement of risk appetite after the Ireland deal helping it shrug off further Chinese tightening measures announced on Friday.

It was off a high of $0.9955, however, as European stocks turned negative. [.EU]

The New Zealand dollar tumbled 0.7 percent after Standard & Poor's downgraded the outlook for New Zealand's foreign currency debt, citing a widening current account deficit and credit risks in its banking sector. [ID:nSGE6AL05L]

(Additional reporting by Neal Armstrong; Editing by John Stonestreet)