FOREX-Euro declines on Spain woes as its bond yield tops 6 pct

* Uncertainty over Spanish bailout request unnerves market
    * Bank of Spain warns of significant fall in GDP in Q3
    * BOJ says ready for more monetary stimulus, yen steady

    NEW YORK, Sept 26 (Reuters) - The euro slipped to a two-week
low against the dollar on Wednesday as Spain's economy weakened
sharply and its 10-year bond yield again topped 6 percent,
increasing worries that the euro zone's debt crisis is
worsening.
    The yen managed to hold its ground against the dollar
despite a Bank of Japan official warning that policymakers
"won't hesitate" to launch another bout of monetary stimulus.
    But traders, following recent trends, remained focused on
the euro after the Bank of Spain said the economy slowed "at a
significant rate" in the third quarter and protests against
unpopular economic reforms in Madrid turned violent.
 
    The news could push the government to request a bailout,
something Spanish Prime Minister Mariano Rajoy told The Wall
Street Journal he might do if Spain's debt-financing costs
stayed too high for too long. 
    Spain's 10-year bond yield topped 6 percent on
Wednesday for the first time in a week, while the euro 
fell to $1.2834, a two-week low. It was last trading at $1.2856,
 down 0.3 percent for the day.
    In another troubled euro-zone nation, Greek police clashed
with hooded rioters hurling petrol bombs as tens of thousands
took to the streets of Athens on Wednesday in Greece's biggest
anti-austerity protest in more than a year. 
    "As if insulted by all the attention that Spanish protesters
were getting, Greek citizens held a protest of their own as
well," said Neal Gilbert, market strategist at GFT in Grand
Rapids, Michigan. "All of this uncertainty is causing investors
to head for the exits and scramble for some safe-haven assets,
propping up the U.S. dollar."
    Spain's government has so far been reluctant to request aid,
though doing so is a condition for the European Central Bank to
help lower borrowing costs by buying Spanish debt. 
    Boris Schlossberg, managing director at BK Asset Management,
in New York, said a Spanish bailout may not help the euro much.
If Spain bows to market pressure and asks for help, he said
traders may start to target indebted Italy, which could make the
debt crisis worse. "Then you have massive risks in the euro
zone."
    The euro, which has already lost 2.5 percent since last
week's four-month high around $1.3169, could fall as low as
$1.25, he said. 
    While a report showing single-family U.S. home sales held
near two-year highs last month had no impact on prices, it was
more evidence "that (housing) is at or near a bottom," said Omer
Esiner, chief strategist at Commonwealth Foreign Exchange, in
Washington.
    
    STUBBORN YEN STRENGTH 
    The euro also fell to a near two-week low against the yen
 of 99.69 yen. The risk of unrest in Greece, where the
government faced its first big anti-austerity strike since
taking power in June, also hurt the euro. The euro was last down
0.4 percent at 99.93 yen. 
    Against the greenback, the yen fell 0.1 percent at 77.72 per
dollar.
    Warnings from Bank of Japan board member Takehiro Sato, who 
told Reuters policymakers were ready to expand monetary stimulus
further, had little effect on the exchange rate. 
    Some traders said half-year book closings in Japan could
pull some funds back into the country, putting mild upward
pressure on the yen.
    But a sustained rally was unlikely, traders said,
particularly now that the Federal Reserve has committed to
keeping U.S. interest rates at zero for the next three years and
 pumping money into the economy until the job market improves.
    Traders said they expected the yen to retest the seven-month
high against the dollar hit on Sept. 13, the day the Fed
announced its aggressive easing policy.
    Countering that trend, Schlossberg said, will take an
equally aggressive Japanese easing campaign.
    "The BOJ has been too cautious," Schlossberg said. "They
need a bigger, open-ended program that really lowers Japanese
yields. Until then, the dollar is simply going to trade on the
yield differential between Treasuries and Japanese government
bonds."