* Euro falls as euro zone debt problems come into focus
* Korean peninsula tension helps dollar
* Markets on edge over Ireland, worried about Spain (Updates prices, adds comment, detail, byline)
By Steven C. Johnson
NEW YORK, Nov 23 (Reuters) - The dollar rose for a second straight day on Tuesday after North Korea's shelling of a South Korean island enhanced the currency's safe-haven appeal, while fear that an Irish debt crisis could spread punished the euro.
The euro plunged to a two-month low beneath $1.34 and also dropped below 111 yen for the first time since mid-September as investors worried that Spain and Portugal may have to follow Ireland in seeking emergency aid to stave off a debt crisis.
That left the euro, in the words of German Chancellor Angela Merkel, in an "exceptionally serious" situation. Analysts said it could easily slip as far as $1.30.
The euro was last trading at $1.3391
"Things could get more troubling, as the market is looking beyond Ireland and turning to Spain and Portugal. Traders will likely target $1.30 into year end," said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York.
Spain frightens investors most, as it is the euro zone's fourth largest economy and, unlike Ireland, still has to raise money on capital markets this year. Spain's short-term cost of borrowing almost doubled at a tender on Tuesday.
This came as North Korea fired scores of artillery shells at a South Korean island, killing two in one of the heaviest attacks by North Korea on its neighbor since the Korean War ended in 1953. It sparked a broader move away from risky trades and into U.S. Treasuries and the dollar. [ID:nL3E6MN0SQ]
The dollar rose 3.5 percent against the South Korean won
Against the yen, which also tends to attract some
safe-haven buying when risk aversion spikes as it did on
Tuesday, the dollar edged down 0.3 percent to 83.03 yen
EURO WOES, FED THINKING
The euro's fall against the dollar extended after U.S. data showed sales of previously owned homes fell more than expected in October, increasing risk aversion. The euro fell below $1.3438 against the dollar, a 50 percent Fibonacci retracement of its August through November rally.
Beyond that, the way is clear for a retest of $1.3333, the August peak, according to Reuters data.
Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, said Europe's debt crisis could frustrate efforts to rebalance global growth as China and others resist pressure to allow more rapid currency appreciation.
"The greater the degree of financial market distress emanating from the euro zone, the less it could be that People's Bank of China allows for any more aggressive moves in its currency," he said.
The euro zone's debt crisis overshadowed the release of minutes from the Federal Reserves's last policy meeting, which showed officials considered even more drastic options to boost growth before it settled on buying $600 billion in Treasuries.
For more, see [ID:nWALNME6T7]
For months, anticipation of the Fed's bond-buying plan, announced earlier this month, pushed the dollar sharply lower against major currencies, though its decline stalled this month as Europe's problems emerged anew. (Additional reporting by Nick Olivari in New York and Anirban Nag in London; Editing by )