* Euro weighed down by worsening debt woes
* Aussie hits 4-week low on RBA, North Korea
* Dollar hits 7-week high vs yen, eyes 85 yen
By Hideyuki Sano
TOKYO, Nov 26 (Reuters) - The euro hovered near a two-month low against a broadly recovering dollar on Friday as a relentless rise in euro zone countries' bond yields fanned worries over their debt financing.
The Australian dollar tumbled after the Australian central bank quashed chances of an imminent rate hike while Japan's yen hit a seven-week low against the the U.S. dollar, with fresh sabre-rattling by North Korea helping the U.S. currency.
"We've been hearing one piece of bad news after another from the euro zone lately. There's even talk of a breakup of the euro zone," said Tsutomu Soma, manager of foreign securities at Okasan Securities.
A majority of euro zone nations and the European Central Bank are urging Portugal to apply for a financial bailout from a European rescue fund, Financial Times Deutschland reported on Friday.
"I think Portugal has already crossed the point of no return. Its bond yield has gone beyond a sustainable level. The market is now watching whether Spain will need a rescue," said a Japanese bank trader.
The euro fell 0.4 percent to $1.3311, within striking distance of Wednesday's two-month low of $1.3284.
Traders believe the euro will have more opportunities to test the downside, with a break below the latest trough seen putting the single currency's trendline support at $1.3230 as the next target, followed by its 200-day moving average around $1.3135.
A break below the 200-day moving average could be seen as more evidence of medium-term weakness after its move below major support, including a 38.2 percent retracement of its rally from June to early November.
The euro's rally earlier this year was in part helped by the fact that the European Central Bank was seeking an exit strategy from its loose policy, in contrast with the U.S. Federal Reserve and the Bank of Japan, which took more easing steps in recent months.
But some market players said that may change soon.
"Because of the debt woes, euro zone countries will now have to tighten their fiscal policy, which will dent growth and put pressure on the ECB to give up its search for an exit sooner or later," said Daisuke Karakama, a market economist at Mizuho Corporate Bank.
"The ECB may say it will extend its offer of unlimited liquidity as early as its next policy meeting (next Thursday)," Karakama said. The ECB extended the measure to early 2011 in September.
Further boosting the dollar, North Korea said impending military exercises by the South and the United States were pushing the region towards war, days after it launched its heaviest bombardment since the 1950-53 Korean War.
The Korean won fell more than 1.5 percent while Korean shares also dropped 1.3 percent, losing much of the ground they had recovered in the past two days.
The dollar rose 0.3 percent to 83.83 yen, having briefly touched 83.89 yen, a level last seen in early October, rising further from a 15-year low of 80.21 yen hit at the beginning of this month.
Rising optimism on the U.S. economy was favouring the dollar, with a fall in U.S. jobless claims published on Wednesday fuelling speculation that next week's payroll data could be strong as well, traders said.
The dollar has also risen well above major resistance at the top end of its ichimoku cloud, which is considered a major bullish sign.
Many traders said the dollar could rise to 85 yen and some even see a test of 85.94 yen, hit right after Japan's unilateral yen-selling intervention in September.
But selling by Japanese exporters is likely to keep the dollar's advance in check. Japanese capital flow data showed foreign investors have been scooping up Japanese shares in the past three weeks.
The Australian dollar fell sharply as Reserve Bank of Australia Governor Glenn Stevens dampened any remaining prospect of an imminent interest rate hike, saying rates were just right and that the bank might not move on policy for some time.
The Aussie fell 0.9 percent to $0.9720, dropping below its 55-day moving average at $0.9777. It hit a four-week low of $0.9705 in late Asian trade.
A critical support point is around $0.9650, a low hit in late October, said Okasan Securities' Soma.
"There will likely be more position unwinding until early December. But the Aussie will also enjoy persistent buying. At a time when both the dollar and euro look fragile, money will flow to commodity currencies like the Aussie," Soma said.
The dollar index, which tracks the greenback's performance against a basket of six major currencies, stood at 79.81, having failed to break resistance at 80.05 in the past two sessions.
Still, a close above the 200-week moving average around 79.73 could add to its bullish signals. (Additional reporting by Koh Gui Qing and Reuters FX analysts Krishna Kumar in Sydney and Rick Lloyd in Singapore; Editing by Joseph Radford)