(Reuters) - The euro wallowed near a 3 1/2-month low against the dollar on Thursday as political deadlock in Greece threatens its rescue deal and raises the specter of the country risking insolvency and leaving the euro zone.
Worries that the euro zone could plunge back into a debt crisis, after a semblance of stability in the past few months, were also supporting the yen near a three-month high.
"Uncertainty over Greece is going to weigh on markets," said Sumino Kamei, senior currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
"There's now open talk about Greece's exit from the euro. The euro is likely to have moved into a new range below $1.30."
The euro fell as low as $1.29115 on Thursday, trading near Wednesday's low of 1.2910, the lowest since Jan 23.
It has broken below its technical support at 61.8 percent Fibonacci retracement of its rally earlier this year from $1.2624 to $1.3487.
It last stood at $1.2943, with next possible support seen around $1.2819, the 76.4 percent Fibonacci retracement of the same rise. Against the yen, the euro stood at 103.12 yen, near a three-month low of 102.76 yen touched on Wednesday.
Against the pound, the common currency was on the verge of falling below 80 pence for the first time in 3 1/2 years, falling as low as 80.03.
Greek Leftist leader Alexis Tsipras gave up his attempt to form a new government on Wednesday, putting Greek Socialist leader Evangelos Venizelos in a position to make a last-ditch attempt to form a government on Thursday.
But chances of any deal on a coalition government looked slim after two failed attempts, making new elections in three to four weeks the most likely outcome.
With Athens due to run out of cash in June, a rerun of elections could be a make-or-break event for Greece as international lenders refuse to renegotiate the terms of the bailout, as Greek voters wanted.
Underscoring the heightening concerns, the spread of Spanish bond yields over safe-haven German bunds widened to a six-month high as Madrid's takeover of the country's fourth biggest lender late on Wednesday highlighted the vulnerability of Spanish banking sector.
While speculators piled euro offers, however, buying related to hedging for option triggers at $1.29 curbed the common currency's slide.
Some traders also said the euro could be resilient due to speculation that the European Central Bank could carry out another long-term funding operation called LTRO if conditions deteriorate further.
"(ECB Governor) Mario Draghi has said so far he has no plan for another LTRO. But the moment when he says he will do it, euro sellers will die instantly," said a currency trader at a Japanese trading house.
Still, with the latest troubles in the euro zone adding to concerns about tepid growth in the United States and China, market players shunned risk-sensitive currencies such as the Aussie dollar and favoured the safe-haven yen.
Indeed, customs data showed on Thursday both Chinese exports and imports grew much slower than forecast.
The yen, which tends to outperform at times of economic stress because of Japan's net creditor position, is broadly supported, having recovered most of the losses that followed the Bank of Japan's easing in February.
The U.S. dollar stood at 79.76 yen, having hit its lowest in nearly three months, at 79.428 per dollar, on Wednesday.
The Australian dollar recovered from a five-month low of $1.0021 hit on Wednesday after upbeat Australian job data reduced expectations that the Reserve Bank of Australia could follow up this month's 50 basis point rate cut with more easing in coming month.
But the Australian unit failed to break above a resistance from its high on Wednesday at around $1.0120, with gains cut by disappointing Chinese data. It last stood at $1.0086, a gain of 0.4 percent on the day.
The British pound recovered from a two-week low of $1.6067 hit on Wednesday ahead of a Bank of England policy decision that will come later on Thursday. It last stood at $1.6136.
A majority of market players expect the bank to keep rates on hold and the quantitative easing total unchanged at 325 billion pounds ($523 billion), but some market players see a chance of the asset purchase program being extended.
($1 = 0.6212 British pounds)
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