* Euro recovers early losses on summit proposals
* Default moves had prompted losses
* Market still wary of disappointment (Updates quotes and prices)
By Nia Williams
LONDON, July 21 (Reuters) - The euro recouped ground on Thursday on signs officials were nearing a deal to bailout Greece with the help of the private sector, although some players were unnerved by the prospect of that including a short-term default.
The euro dived early in the session as players unwound some of the bullish positions built up ahead of a summit of euro zone leaders -- prompted largely by a knee-jerk reaction to officials admitting openly a selective default was on the cards.
Ahead of the crisis summit, Dutch Finance Minister Jan Kees de Jager said a short-term or selective default for Greece, previously opposed by the European Central Bank, was now a possibility.
EU sources said the ECB -- one of the key barriers to a broader solution to the Greek crisis -- was willing to give way on the default issue.
The euro jumped to $1.4240 from as low as $1.4190 after the draft outline of the summit proposals emerged.
"The market was long and is quite nervous. This talk of the possibility of a default and the package not being quite as neat as people expected from a banking point of view is not helping," said Sebastien Galy, FX strategist at Societe Generale.
"There are a tremendous amount of leaks coming through but most of the information we already know. That means technical levels are very important right now," SocGen's Galy said.
The euro earlier hit a low for the day of $1.4138 and technical analysts said the outlook for the euro was likely to be bearish while it remained below resistance around $1.4300, coinciding with the 100- and 55-day moving averages.
Downside support for the euro is now seen at $1.4120, the 61.8 percent retracement of the July move higher, at the 200-week moving average around $1.4023, and then at the 200-day moving average at $1.3914.
"If the euro closes the week below $1.40 and below the 200-week moving average then it is likely to head towards $1.35," said CMC Markets analyst Michael Hewson.
CONTAGION FEARS
Fears that Greece's debt crisis could spread to bigger economies in the euro zone have kept markets on edge since early July, with yields on Italian and Spanish government bonds reaching euro zone lifetime highs above 6 percent.
Analysts said market players would be looking to see whether the summit agreement soothed contagion concerns.
"Anything that comes out needs to be really convincing to limit the risk of contagion to Italy and Spain which has materialised in the last few weeks," said Derek Halpenny, currency strategist at Bank of Tokyo-Mitsubishi UFJ.
Traders had also been worried by worse-than-forecast purchasing managers' surveys for Germany and the euro zone as a whole as weighing on the single currency.
Investors remained wary ahead of an August 2 deadline for raising the U.S. public debt ceiling to avoid a default, and the threat of a downgrade to the United States' triple-A credit rating.
Philadelphia Federal Reserve Bank President Charles Plosser told Reuters on Wednesday that the Fed was actively preparing for the possibility that the United States could default.
The Australian dollar dipped 0.4 percent to $1.0699 amid the bout of risk aversion, compounding losses sustained after a survey of manufacturers' showed activity in China's manufacturing sector shrank in July. (Additional reporting by Jessica Mortimer; editing by Patrick Graham)