* Euro erases gains vs dollar on euro zone growth worries
* Sterling slips after BOE inflation report
* Spain announces spending cuts, Portugal taps debt market (Adds quotes, updates prices)
By Wanfeng Zhou
NEW YORK, May 12 (Reuters) - The euro dropped against the U.S. dollar on Wednesday, erasing early gains as worries about euro zone growth offset news of more spending cuts by Spain and a successful bond sale by Portugal.
The euro fell back to around $1.2640 after hitting as high as $1.2739 earlier in the global session as investors remain concerned as to whether weaker euro zone economies can deliver on promises to trim their deficits as well as the long-term impact of austerity measures on European growth.
"Basically it's still a sell on rallies," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. "It's the much longer term and much more fundamental, negative outlook for the euro zone that is keeping the euro under pressure."
In midday New York trading, the euro was down 0.1 percent at $1.2642, after earlier rising to $1.2739, according to Reuters data. The euro zone currency hit a 14-month low near $1.25 last week and is still down 11.7 percent so far this year.
Against the yen, the euro was still up 0.1 percent at 117.46. The dollar rose 0.3 percent at 92.94 yen.
The euro had gained in early trading as narrowing bond spreads helped ease debt worries in the euro zone and prompt a squeeze in short euro positions, which hit a record high last week. Some investors were said to be increasingly wary of the pace of the euro's recent decline.
Spain announced public spending cuts to rein in its budget deficit as part of its drive to meet European Union targets, after global policymakers announced a $1 trillion emergency aid package over the weekend to stave off a wider euro zone debt crisis.
In the debt market, Portugal sold 1 billion euros ($1.27 billion) in 10-year bonds with demand exceeding supply. Government officials said Portugal would not need to draw on the funds in the euro zone rescue package.
"Those are some reasonably bright spots," Dolan said. "To the extent that the financial aid package provides a backstop for sovereign debt, those auctions should have gone well."
STERLING FALLS
Traders said any bounce in the euro is likely to be short-lived. In the near term, the key support level for the euro/dollar is near $1.25, the pair's 14-month low hit last week.
Investors also cited talk of a double no-touch option position in the euro with barriers at $1.25 and $1.31. Such a position suggests that the holder would buy euros on any drop toward $1.25 to defend that position until it expires.
Data on Wednesday showed the euro zone economy grew 0.2 percent in the January-March period from the previous quarter, for a 0.5 percent year-on-year gain.
"I still think the euro is going to continue to slide," said Fabian Eliasson, vice president of FX sales at Mizuho Corporate Bank in New York.
"There's going to be very little growth in the area for quite some time. The U.S. will definitely raise interest rates before Europe at this juncture," he said.
Meanwhile, sterling slipped 0.6 percent to $1.4860 after the Bank of England struck a dovish stance in its quarterly inflation report, raising speculation that UK interest rates will stay low for months to come.
The pound relinquished gains made earlier after UK Conservative Party leader David Cameron became Britain's new prime minister on Tuesday, having secured a power-sharing deal between his center-right party and the Liberal Democrats to end days of political uncertainty.