* Euro slips, may retreat more from 4-½ mth peak
* Portugal politics weigh on euro
* EU set to delay decision on euro zone bailout fund
* Yen trapped by wariness over intervention
By Masayuki Kitano and Naomi Tajitsu
SINGAPORE/HONG KONG, March 24 (Reuters) - The euro slipped on Thursday, pulling further away from a 4-½ month high versus the dollar on heightened worries that political instability in Portugal may force it to become the latest country in the region to seek a European Union bailout.
The single currency slipped to the day's low of $1.4071 as concerns about weakness in debt-heavy euro zone economies were highlighted by a media report that ratings agency Moody's would downgrade the credit ratings of Spanish banks on Thursday.
Market participants said the euro could slide further to $1.40 in the near term. Traders said light stop-loss orders were creeping below that level on Thursday.
Portuguese Prime Minister Jose Socrates resigned on Wednesday after parliament rejected his government's latest austerity measures aimed at avoiding a bailout. [ID:nLDE72M00L]
"If -- and this is a big if -- there is a bailout for Portugal, the question would be how it would be negotiated with a government in essentially a caretaker mode," said David Forrester, currency strategist at Barclays Capital in Singapore.
Many in the market anticipate Lisbon could appeal for a debt bailout in the near future as the government struggles to refinance its loans as yields rise.
News that European leaders are unlikely to take a decision on how to strengthen the euro zone's bailout fund until June also weighed on the single currency. [ID:nLDE72M1E6]
The euro
The euro has retreated after its rise earlier this week stalled at $1.4249, its highest level since early November.
"We have seen the top in EUR/USD for now," said a trader at a European bank in Singapore, adding he would sell into any rally towards $1.4140 and add to short positions around $1.40.
"We will see it back to $1.3850 pretty soon on the back of too much optimistic sentiment priced into the euro."
The mid-$1.3850 region is considered key support, given that the single currency rose to $1.3862 in early February during a sharp rally at the start of the year. It later pulled back before embarking on its latest climb.
Above that, the euro could be cushioned in the $1.4015-55 area, which contains a series of intraday highs hit earlier this month.
Some analysts say the euro is unlikely to enter a protracted downtrend at this point, given expectations the European Central Bank will raise interest rates as early as April.
This would support the single currency as it would boost its rate differential against the dollar and other lower-yielding currencies.
But others in the market question the ECB's intent to tighten monetary policy at a time when some euro zone countries are suffering from fiscal issues, an issue which may haunt the euro in the future.
DOLLAR SUPPORTED
The euro's latest drop gave some reprieve to the dollar.
The dollar index, which measures the dollar's value against a basket of currencies, edged up 0.2 percent to 75.936 <.DXY>, clinging to the gains it made on Wednesday.
Against the yen, the dollar held steady from late U.S. trade
at 81.00 yen
Market players are wary that Japan may intervene further to sell the yen if the dollar drops below 80 yen, and especially if such a move occurs in volatile trade as was the case last week, when the yen hit a post-World War Two record high of 76.25 to the dollar.
At the same time, traders say Japanese exporters are likely to sell the dollar on any rallies, helping keep the yen stuck in a thin range against the dollar. Traders cited some selling demand from Japanese exporters around the 81.00 level.
Some argued that the longer the dollar hovers above 80 yen ahead of Japan's fiscal year end next week, the more exporters may be forced to lower their dollar-selling offers, which may see the U.S. currency weaken in the coming days.
Sterling was flat at $1.6230
The pound also struggled after minutes from the latest Bank of England policy meeting showed policymakers were less hawkish than some market watchers had expected. Investors are pricing in a UK interest rate rise in July. [ID:nLDE72M0W6] (Additional reporting by Reuters FX analyst Rick Lloyd in Singapore; Editing by Kim COghill)