* Japan will use existing euro reserves to buy EFSF bonds
* Debt auctions in Portugal, Italy, Spain in focus
* Euro weakness to resume, seen sliding toward $1.2590 (Updates with euro reversing gains)
By Wanfeng Zhou
NEW YORK, Jan 11 (Reuters) - The euro slipped against the dollar on Tuesday with more losses expected after a pledge by Japan to buy euro zone bonds failed to calm fears of a sovereign debt crisis spreading to Portugal and Spain.
The euro had earlier climbed near $1.30 after Japan said it will purchase euro zone bonds to bolster confidence in the European Financial Stability Facility (EFSF), but gains faded after Tokyo said it would use existing euro reserves to pay for the debt.
A critical test for the euro will come on Wednesday when Portugal is scheduled to sell up to 1.25 billion euros of bonds in an auction that will signal whether the indebted country will be able to afford to raise funds in the debt market or be forced to take a bailout.
"The support (from Japan) looks set to come from existing euro reserves, so it will not form an increase in the allocation of the euro," said Mary Nicola, currency strategist at BNP Paribas in New York. "In fact, if it's a reallocation away from the peripheral bond markets to the EFSF bonds, then it could prove to be euro negative.
"We are expecting to retest yesterday's $1.2875 low, and a break below here could trigger a further euro/dollar decline toward $1.2645 and $1.2590 in the coming weeks," she added.
Tokyo's pledge came after China assured Spain it would invest in the indebted euro zone state's bonds -- an assurance whose impact also proved fleeting.
The euro last traded down 0.2 percent at $1.2917, having risen as high as $1.2992 on trading platform EBS.
Resistance is at its 200-day moving average of $1.3072 while support is around $1.2794, the 61.8 Fibonacci percent retracement of a June-to-November rally.
The euro rose 0.4 percent to 107.51 yen from a four-month low of 106.75 yen set on Monday. It gained 0.6 percent to 1.2607 Swiss francs.
AUCTIONS IN FOCUS
The euro could easily resume its downward path given mounting unease over a heavy schedule of debt issuance by southern European countries this week, analysts said.
Markets have already pushed the 10-year Portuguese yield to punishingly high levels above 7 percent.
Portugal's prime minister and finance minister said on Tuesday Portugal has no plans to seek a bailout, and the government was doing everything possible to avoid doing so.
Italy and Spain are also due to tap the bond market on Thursday, in auctions that will also be closely watched for any sign of contagion.
Analysts said the euro could see a relief rally once the three bond auctions were out of the way, though if borrowing costs stayed high any gains would be temporary as attention would turn to when a call for outside assistance might come.
"The euro may see a bounce -- a knee-jerk one -- if these auctions see a good bid-to-cover ratio," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "But success will come at a price."
The dollar rose 0.6 percent on the day to 83.01 yen, supported by Japanese importers' bids.
The Australian dollar shed more than 1 percent to a one-month low of $0.9820, on speculation that more flooding in the country may dent its economic growth.
(Additional reporting by Naomi Tajitsu and Anirban Nag in London) (Editing by Theodore d'Afflisio)