* Key retracement level offers euro support
* Market players turn back risk trades slightly
* Euro shrugs off downgrades of Ireland
By Hideyuki Sano
TOKYO, Nov 24 (Reuters) - The euro edged up from a two-month low on Wednesday, finding support after a massive sell-off sparked by the euro zone debt crisis and heightened tensions in the Korean Peninsula.
The common currency ticked up on light buying back after Europe's inability to contain Ireland's debt woes had knocked it down 1.9 percent to as low as $1.3359 on electronic platform EBS.
As the low represented an almost 38.2 percent retracement of the euro's rally this year to $1.4283 in early November from $1.1876 in June, the euro may have found short-term support there, said Sumino Kamei, a senior analyst at the Bank of Tokyo-Mitsubishi UFJ.
The euro rose 0.3 percent to $1.3405 on the day, shrugging off the news that Standard and Poor's had downgraded its sovereign rating on Ireland.
"The fact that the euro didn't fall further on the downgrade suggests that the euro's drop may be over at least for the short term," Kamei said.
Market players' risk aversion also slightly eased as the Korean won recovered from lows and regional shares fared better than some investors had feared a day after North Korea fired scores of artillery shells at a South Korean island.
That also helped the Australian dollar gain 0.6 percent from late U.S. levels to $0.9784, a halfway recovery from Tuesday's fall to a four-week low of $0.9708.
The dollar was little changed against the yen at 83.20 yen.
Traders said market liquidity is lighter than usual due to a U.S. market holiday on Thursday, which means prices can be exaggerated in either direction.
German Chancellor Angela Merkel said the euro was in an "exceptionally serious" situation. Investors took aim at Spanish government bonds on Tuesday, driving the premium over German benchmarks to a euro lifetime high after Madrid was forced to pay a high cost to sell short-term bills.
"Contagion from the Irish situation during the last few months was largely limited to Greece and Portugal. Not any more," wrote Matthew Strauss, strategist at RBC Capital Markets, in a note.
In addition, a deepening political crisis in Ireland could derail the financial rescue to recapitalise the country's banks and fund its public finances.
Given these worries, some traders think a further fall in the euro cannot be ruled out.
They say another key support for the euro is in the $1.3333 area, its August high. A break of that level could pave the way for a retest of $1.3232, a 61.8 percent retracement of its August-November rally, before $1.3000. (Additional reporting by Ian Chua in Sydney; Editing by Michael Watson)