* Euro falls below 200-day moving average around $1.3130
* Euro/dlr volatilities up as market senses further falls
* Lukewarm response to Italian debt auction (Updates prices, adds comment, changes byline, dateline; previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, Nov 29 (Reuters) - The euro fell to two-month lows against the U.S. dollar on Monday as a rescue package for Ireland failed to soothe a market worried about the next possible debt-stricken euro zone economy to implode.
Analysts expect further losses in the euro given the uncertainty surrounding the fiscal outlook of the region's peripheral countries. The next key target is $1.30 after the euro fell below the 200-day moving average around $1.3130.
European Union finance ministers endorsed an 85 billion euro rescue package for Dublin and approved outlines of a permanent crisis-resolution system that could make private bondholders share the burden of restructuring sovereign debt after 2013.
Sentiment remained fragile with a sale of Italian bonds meeting lukewarm demand and highlighting investors' unease about euro-zone debt.
"The markets remain concerned about prospects in the euro zone," said Matthew Strauss, senior currency strategist at RBC Capital in Toronto. "If Spain were to apply for a bailout, that would require a bigger amount because of the size of its economy. And this continues to weigh on the euro."
The euro fell was last at $1.3094 down 1.45 percent on the day. Investors took out option barriers at $1.31, traders said.
Euro/dollar implied volatilities extended a recent rise, reflecting nervousness about the single currency. One-month volatilities rose to 15.00 percent from 13.60 on Friday.
The one-month 25-delta was trading around 2.0 for euro puts versus 1.85 on Friday.
The cost of insuring Portuguese and Spanish debt against default rose to a record high on Monday.
Many traders said the European Financial Stability Facility, a joint EU-International Monetary Fund reserve created in May, may not have enough funds to support Spain if it needs help.
IRELAND TO IBERIA
Ireland said the emergency loans would run for an average of 7.5 years, with an interest rate of around 6 percent. Many analysts say markets are still likely to turn on Portugal and Spain, seen as the euro zone's next weakest links.
Another source of uncertainty is a lack of details on a Franco-German proposal to make private bondholders share the burden of losses on sovereign debt restructuring.
"That suggests the broader fiscal backdrop in the euro zone could remain troubled for longer, particularly if other, larger countries also require bailout programs, and as well raises troubling questions about moral hazard," wrote Bob Lynch, currency strategist at HSBC in New York.
Analysts said the market would be watching whether European Central Bank policymakers, meeting on Thursday, would remove some of the emergency measures put in place earlier this year.
The euro's losses helped the dollar index to its highest in two months, above 81.004, up 0.8 percent on the day. The dollar also hit a two-month high of 84.34 yen, up 0.4 percent.