* Euro falls on fears debt crisis may hit banking system
* Dollar, yen favoured as risk sentiment deteriorates
* Aussie dlr hit on weak data, RBA leaves rates on hold
(Changes date line, adds quote, previous TOKYO)
By Neal Armstrong
LONDON, June 1 (Reuters) -The euro fell on Tuesday as fears the euro zone's debt crisis could spread to its banking system hit the single currency, while deteriorating sentiment supported the greenback.
Rising tensions in the Middle-East following Israel's storming of aid ships bound for Gaza fuelled safe-haven demand for the dollar, with disappointing Chinese data also hurting risk appetite.
The European Central Bank warned on Monday that euro zone banks faced up to 195 billion euros in a "second wave" of potential loan losses over the next 18 months due to the financial crisis, and said it had increased purchases of euro-zone government bonds.
"Focus is back on to euro zone problems this morning and it is the bad loans story that is weighing on the euro in early trading," said Audrey Childe-Freeman, currency analyst at Brown Brothers Harriman.
At 0730 GMT, the euro was trading with losses versus the dollar of around 1 percent at $1.2185.
It was hovering above a four-year low of $1.2143 struck on May 19. Near-term support is seen around $1.2135, the 50 percent Fibonacci retracement of the currency's 2000-08 advance.
The euro's close on Monday marked its sixth consecutive monthly decline, the longest losing sequence the single currency has experienced since 1999, just after its inception.
Versus the yen, the euro traded with losses of over 1 percent at 110.60 yen. It also slipped to a 1-year low versus sterling of 84.15 pence.
"The euro is still reacting to negative issues," said Ian Stannard, currency strategist at BNP Paribas, adding that Spain's downgrade by Fitch last week was also weighing on the currency.
Fitch Ratings cut Spain's credit ratings to AA+ from AAA on Friday, saying its economic recovery would be more muted than the government forecast.
AUSTRALIAN DOLLAR
The Australian dollar was knocked after approvals for building new Australian homes dived in April, backing bets the Reserve Bank of Australia (RBA) would not raise interest rates again soon.
The RBA kept rates on hold at 4.5 percent but traders who were watching for hints that it might hold rates steady for the coming months, only got a central bank statement saying that its policy was appropriate for the near term.
"Economic fundamentals in Australia are not so negative but the impact from Europe, worries that the pace of China's economic growth may slow, and weakness in stocks are all weighing on the Aussie," said Tomohiro Nishida, treasury department manager at Chuo Mitsui Trust and Banking.
The Australian dollar slipped around 1.5 percent to trade at $0.8330.
China's official purchasing managers' index (PMI) fell to 53.9 in May from 55.7 in April. Australia's heavy reliance on trade with China makes it sensitive to Chinese indicators.
The dollar traded with gains of around 0.5 percent versus a currency basket at 87.044 as European equity markets followed Asian stocks into negative territory and risk appetite deteriorated.
"Disappointing Chinese data and Middle-East tensions are favouring the dollar today," said Brown Brothers' Childe-Freeman. (Additional reporting by Rika Otsuka, editing by Mike Peacock)