* Euro off lows, but vulnerable to more falls
* Euro/yen risk reversals show huge demand for euro puts
* Yen rise risks intervention by Japanese authorities
* Aussie hits 1-mth low below US$1.03, CAD at 7-mth low (Adds quote, details; updates prices)
By Anirban Nag
LONDON, Sept 12 (Reuters) - The euro fell to a seven-month low against the U.S. dollar and a 10-year trough versus the yen on Monday, hurt by fears of a Greek default and the risk of contagion engulfing the region's banking system and larger economies.
The yen was a big beneficiary of safe-haven inflows, keeping alive the risk of intervention by Japanese authorities.
Italian and Spanish yields rose, widening their spreads over German Bunds, while European stocks and banking shares fell, highlighting how brittle investor confidence was in euro zone assets.
The common currency fell as low as $1.34949 , its lowest since February before recovering to $1.3633, still down 0.2 percent on the day on top of a 1.6 percent fall on Friday. It came off lows on bargain hunting from European funds and sovereign investors, but analysts expected further falls.
"Bargain hunting has lifted the euro a bit higher in the European session but clearly it is vulnerable to downside risks in the coming days and weeks," said Jane Foley, senior currency strategist at Rabobank. "Investors will look to fade (sell) into rallies."
Against the yen, the euro fell 1.7 percent to 103.90 yen , its lowest in 10 years, having broken below big option triggers at 105 yen and 104.50 yen. It was last at 104.91 yen, down 1 percent on the day.
The Japanese last intervened in the currency market on Aug 4 to topple the yen from record highs against the dollar. The dollar was last down 0.75 percent at 76.99 yen , not far from its record low of around 75.94 yen struck in mid-August.
The Australian dollar, seen as a barometer of market players' risk appetite, fell more than 1.5 percent to a 1-month low of $1.0276 as investors fretted that the global economy could be dealt a blow if euro zone debt woes deepen.
BEARISH BETS ON EURO
As market players bet on a further fall in the euro against the yen, risk reversal spreads for euro/yen rose to their widest in over a year in favour of euro puts, or bets on the euro falling. One-month and three-month euro/dollar risk reversals also showed a fresh record high bias for euro puts. .
Latest data from the Commodity Futures Trading Commission showed speculators have added to their bearish bets against the euro in the latest week to Sept. 6. Net short positions stood at 36,443 contracts, up from 384 contracts.
Although traders said the euro may have been oversold in the very short term, market commentators saw plenty of room for more falls, particularly once it breaks below $1.35.
"We have become more pessimistic on the outlook for the euro zone and on European policymakers' ability to tackle the crisis," said Colin Harte, director of currency and fixed income at Barings Asset Management, which has around $40 million in currency hedge funds.
"Short-term the euro selling might be a little overdone, but the problem is still there," he said, adding the euro "could easily touch $1.30" if the situation in the euro zone does not improve.
Concerns about a Greek default rose after senior politicians in German Chancellor Angela Merkel's centre-right coalition started talking openly about a possible default.
This came after Juergen Stark's surprise departure from the European Central Bank last week highlighted major disagreement among policymakers. Meanwhile, markets were bracing for possible ratings downgrade on France's top banks, as well as Italy's sovereign rating.
"For now market confidence in the political leadership has collapsed and unless they step in to back stop the banking system, it will be only a matter of time before the $1.35 level in the euro is attacked," said Lena Komileva, senior vice president, foreign exchange at Brown Brothers Harriman.
The euro's sell-off started last week after European Central Bank President Jean-Claude Trichet shifted the monetary stance from a hawkish bias to a more neutral one.
The euro's broad losses helped the dollar index rise to its highest level in over six months. It was last up 0.1 percent at 77.237 with strong resistance at the 38.2 percent retracement of the index's fall from a high of 88.71 on June 7, 2010 to a low of 72.696 on May 4, 2011 which comes in at 78.80.
With commodity currencies under pressure, the Canadian dollar also fell to a seven-month low against the U.S. dollar . (Additional reporting by Jessica Mortimer; Editing by Anna Willard)