FOREX-Euro hits 1-yr low vs dollar on contagion fears

* Euro hits 1-yr low vs dlr, contagion fears dominate

* Dollar index climbs on safe-haven demand

* Germany, IMF warn euro debt crisis must stop at Greece

(Adds detail, updates prices)

By Naomi Tajitsu

LONDON, May 5 (Reuters) - The euro hit a one-year low against the dollar on Wednesday on concerns Greece's debt problems could spread to other economies such as Spain and Portugal.

Fears the euro zone debt crisis may not end with Greece cranked up risk aversion and added to safe-haven demand for the dollar, pushing it to its highest against a currency basket since May 2009.

In European trade, the euro slid to $1.2928, according to Reuters data, after Germany and the International Monetary Fund warned of financial contagion unless the crisis is stopped in Greece. [ID:nSGE644093]

At 1102 GMT, the euro was down 0.4 percent on the day at $1.2932.

The cost of insuring Spanish and Portuguese debt against default rose on Wednesday, and analysts said contagion fears would keep the euro pressured.

"The questionable way the Greek crisis has been handled and concerns about the peripherals are weighing on sentiment. I expect euro weakness to remain in place," said Kenneth Broux, market economist at Lloyds Banking Group.

"I see $1.25 as the next big level on the downside," he said.

Investors remain highly sceptical Greece will be able to deliver the tough austerity measures it promised in return for a 110 billion euro aid package from the European Union and the International Monetary Fund. [ID:nLDE6430PO]

Highlighting selling pressure on the euro, the head of the German's exporters' association said on Wednesday markets may drag the single currency down to parity against the dollar by the end of the year. [ID:nBAE003778]

The euro has fallen roughly 3 percent so far this week and is poised to post a loss for the week of more than 3 percent, which would be the biggest weekly loss since March 2009.

The single currency showed little reaction to euro zone services sector data which indicated that the economic recovery has momentum. [ID:nSLA4GE62T]

The dollar index <.DXY>, which measures the greenback against a basket of six currencies, was 0.4 percent higher at 83.606, after climbing to 83.649, its highest since May 2009.

"The dollar is winning largely by default as the other side of the euro trade," said Adam Cole, global head of FX strategy at RBC Capital Markets.

BROAD EURO LOSSES

Analysts said the $1.2880-85 level in the euro -- a low hit in April 2009 -- would be the next target, and a breach of that area would open the way for a test of $1.25, a level not seen since March 2009.

Technical analysts highlighted support at $1.2930, the 78.6 percent retracement of the 2008-2009 rally.

The euro also fell to its weakest against the pound in nearly nine months on Wednesday, stumbling to 85.45 pence , according to Reuters data, down about 0.2 percent on the day.

Sterling faces its own test this week in a tightly contested parliamentary election on Thursday, from which markets are concerned no clear winner will emerge. [ID:nLDE6430DK]

The U.S. currency gained 0.2 percent on the yen to 94.75 yen , edging close to an eight-month high of 94.99 yen struck on Tuesday. However, talk of option barriers at 95 yen capped the dollar's rally.

(Reporting by Neal Armstrong, editing by Nigel Stephenson)