* Dollar falls versus yen
* Euro breaks through 55-day SMA at $1.2677
* Australian dollar bounces but downside risks remain
(Updates prices)
By Nick Olivari
NEW YORK, Aug 23 (Reuters) - The euro slipped on Monday as euro zone data added to concerns over the economy and investors bet on prospects of loose monetary policy until year-end.
Sentiment has begun to turn sour on the single currency after a rally in late July and early August. Investor focus has shifted back to the euro zone and away from the U.S. economy.
Euro support dwindled further on Friday after European Central Bank Governing Council member Axel Weber said the ECB should extend its loose monetary stance.
Adding to the negative sentiment, a survey of euro zone purchasing managers on Monday showed slower manufacturing growth in the region in August.
"August's deceleration in activity has dented some of the euro bulls' arguments about economic outperformance vis-a-vis the United States and as such put a cap on any euro rally for now," said Boris Schlossberg, director for currency research at GFT in New York.
The euro "continues to be hobbled by concerns over the economic health of the periphery members, and today's mildly weaker-than-expected results from core Europe have not helped to assuage those worries," he said.
In late afternoon trading in New York, the euro was down 0.9 percent against the yen at 107.90 yen after falling to its lowest in nearly eight weeks.
Against the dollar, the single currency was 0.4 percent lower at $1.2660. The euro fell as low as $1.2647 after breaking below its 55-day simple moving average at $1.2677, according to Reuters data.
In another technical move, a sell signal on the euro against the dollar was triggered on Monday when the 12- and 26-day moving average convergence divergence indicator moved into negative territory for the the first time since July 2.
The MACD, which is used as an indicator of short-term momentum, was last at -0.0018.
Technical analysts said the next support level is $1.2605, a 50 percent retracement of the euro's rise from a four-year low of $1.1876 in June to its August peak of $1.3334.
Figures compiled by the Commodity Futures Trading Commission showed currency speculators extended euro short positions in the week ended Aug. 17.
Data from UBS AG also showed a drop in net investment flows into the euro zone for a third consecutive week.
SIGNAL FROM JAPAN
The dollar was down 0.5 percent against the yen, at 85.22 yen, close to a 15-year low of 84.72 yen hit earlier this month.
Markets were disappointed that a much-hyped meeting between Japanese Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa failed to live up to expectations.
Both agreed to work closely but offered few clues on whether further monetary easing was possible. "Dollar/yen is headed toward the 85 yen level and for the euro toward support that comes in just above 107 yen," said Tom Levinson, FX strategist at ING.
The Australian dollar fell after being dented by political uncertainty from an inconclusive general election. The currency slid after neither major party in Australia won an overall majority in Saturday's election. The Aussie traded as low as $0.8833 but pared losses to trade at $0.8913, still down 0.3 percent, helped by buying from real-money accounts. On electronic trading platform EBS it fell to $0.8835.
"If the incumbent party appears as though they will stay in power, look for the aussie to lose momentum," said Jessica Hoversen, fixed income and currency analyst at MF Global in Chicago. A "Labor win means that the mining tax will remain intact at 30 percent."
The incumbent Australian Labor Party plans a tax on mining profits, which investors fear would make foreign and domestic investment less attractive, reducing the demand for the Australian currency. The opposition Liberal Party would scrap the planned tax. (Additional reporting by Neal Armstrong; Editing by Andrew Hay) (Reporting by Nick Olivari and Vivianne Rodrigues; Editing by Andrew Hay)