* Euro eases from 4-1/2-month high versus dollar
* Portugal's parliament says 'No' to austerity budget
* Sterling falls after UK growth forecast (Adds details, updates prices)
NEW YORK, March 23 (Reuters) - The euro fell on Wednesday, hurt by fears debt-ridden Portugal will require a bailout after its parliament rejected the minority government's austerity measures.
The vote is likely to cause the government's collapse.
Prime Minister Jose Socrates has said he will resign if the plan fails to clear parliament and Portugal would probably be forced to seek foreign aid.
Socrates is to meet President Anibal Cavaco Silva later Wednesday. For more, see: [ID:nLIS002609].
The euro extended declines on the news and fell to a session low, although it recovered as investors debated how much of the news was already priced in.
"This raises the likelihood that Portugal will require a bailout, but the question is about how much the market has already factored this in," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "I'd say it's been factored in to a significant degree, given the run-up we've seen in Portuguese yields and CDS."
Earlier, an International Monetary Fund spokeswoman said Portugal had not requested a loan program backed by the institution, dismissing speculation Lisbon was in talks with the fund.
The euro
"The euro is holding up pretty well," Dolan said. "The feeling is the periphery is covered by the bailout fund and the core is in good shape."
Dolan suggested euro/dollar will still test $1.44-45 in the short run.
Most investors are betting any losses in the single currency should be limited amid expectations of rising euro zone interest rates.
The euro was already down from a 4-1/2-month high against the dollar, set in the previous session, ahead of the Portuguese vote, after failing to break through options barriers in the $1.4250 area. Analysts said the euro could dip below $1.40 in the short term before rising toward $1.4280, the November high.
Adding to bearish euro sentiment was a document showing European leaders will decide how to increase their bailout fund only in June, not this week. [ID:nBRU011391]
The yield on Irish government bonds soared to euro-lifetime highs on uncertainty over whether a European summit later this week will agree on an improvement of the terms on bailout loans. [ID:nLDE72M0V0]
Sterling was last down 0.8 percent to $1.6242
DOWNSIDE LIMITED
The prospect of higher interest rates, combined with a sense that European policymakers have the will to resolve the debt crisis, was expected to keep the euro supported around $1.40, analysts said.
"Economically, the euro zone is showing clear signs of recovery, politically the politicians are heading in the right direction and expectations of the ECB raising rates favors the euro over the U.S. dollar," said Thanos Papasavvas, head of currency management at Investec Asset Management, which manages over $10 billion in currency funds.
"We hold an overweight position in the euro and will be looking to buy on any dips if the euro corrects," he added.
The dollar was down 0.1 percent against the yen at 80.85