FOREX-Dollar hits 2-mth low vs euro; US bailout, Fed eyed

* Dollar slides across board, hits 2-mth low vs euro

* Dollar hits 2-mth low vs basket of currencies <.DXY>

* Focus on fate of U.S. automakers, Fed rate decision

(Changes byline, adds comment, updates throughout)

By Naomi Tajitsu

LONDON, Dec 15 (Reuters) - The dollar hit a two-month low against the euro and a basket of currencies on Monday, as investors shunned the U.S. unit on uncertainty surrounding the fate of its ailing automakers and the possible economic impact.

The dollar was starting to respond negatively to concerns about further weakness in the U.S. economy, after an ongoing run of weak data had boosted the currency due to an exodus from risky positions.

"The tide seems to have turned around in recent sessions, with bad U.S. economic news now hurting the dollar rather than helping it," said UBS analysts in a research note.

By 1223 GMT, the euro was up 1.0 percent at an eight-week high of $1.3508 , according to electronic platform EBS.

The dollar also hit a two-month low against a basket of currencies at 82.897 <.DXY>.

Analysts said the dollar was also suffering as investor demand to dump risky positions and repatriate those funds back into the U.S. currency have started to dry up. Deleveraging trades have also started to calm as currency markets show some sign of stabilising, they added.

The yen fell slightly against the dollar to 90.65 yen, after hitting 13-year highs of 88.10 yen on Friday. Yen gains were capped on speculation that Japanese authorities could intervene to curb further rapid appreciation.

Sterling was supported against the broadly weak dollar, although ongoing concerns about the rapid deterioration of the UK economy helped to push the pound to a record low of 90.22 pence against the euro , according to Reuters data.

Investors also awaited the outcome of a policy meeting by the Federal Reserve on Tuesday to see how close to zero the U.S. central bank will cut interest rates and indicate whether it will aggressively deploy quantitative easing measures to shelter the economy from a downturn.

The Fed is widely expected to cut rates by 50 basis points or more from 1 percent. With interest rates rapidly approaching zero, the Fed may also indicate more steps to provide liquidity into the market to help support the economy through a recession.

"The interesting question is whether the Fed is just going to cut rates, or if it's going to start suggesting that the modus operandi of monetary policy is going to change," said Steve Barrow, head of G10 currency research at Standard Bank in London.

He added that markets were also keen to see the possible impact of any modified proposal to bail out U.S. automakers, which are teetering on the brink of failure, and how any plan would affect the larger economy.

BAILOUT IN FOCUS

The White House said on Friday it was considering tapping a $700 billion financial industry bailout fund to prevent a collapse of ailing U.S. automakers [ID:nWAT010655].

That came after the U.S. Senate on Thursday rejected a bailout plan to avert a possible bankruptcy by one or more of the nation's three automakers.

But U.S. President George W. Bush said on Monday an announcement on a car industry rescue was not imminent, leaving the industry's fate clouded for a little longer [ID:nN14461208].

Investors fear a failure of any of the automakers would exacerbate a year-long recession and drag other companies under.

A 0.3 percent rise in European shares <.FTEU3> and rallying Asian shares eased extreme risk aversion, prompting demand for higher-yielding currencies. The Australian dollar rose 0.3 percent and New Zealand dollar was up 1.2 percent .

Market reaction was limited to the Bank of Japan's quarterly tankan survey showing corporate sentiment deteriorated sharply.

The headline index for big manufacturers' sentiment fell to a nearly seven-year low of minus 24, down from minus 3 in the previous survey in September. [ID:nT66530]

(Editing by Victoria Main and Toby Chopra)