* Italian, Spanish yields rise as contagion fears grow
* Investors doubt Europe (Chicago Options: ^REURUSD - news) 's ability to contain debt crisis
* Euro/dollar nears support at $1.3481, yen strengthens
(Adds comments, details, updates prices)
NEW YORK (Frankfurt: A0DKRK - news) , Nov 15 (Reuters) - The euro fell against the dollar for the second straight day and hit a five-week low against the yen on Tuesday, with more selling expected on fears the euro zone's debt crisis is spreading across the region.
Yields on Italian benchmark 10-year bonds climbed back above the key 7 percent, a level widely deemed unsustainable, and Spanish borrowing costs rose ahead of the launch of a new 10-year bond launch on Thursday. [GVD/EUR]
In a worrying sign of contagion, the spread of French, Belgian and Austrian 10-year bond yields over German Bunds all hit their highest levels since the euro was launched in 1999, while the equivalent Dutch spread hit its widest since early 2009.
Adding to bearish sentiment, the German ZEW survey showed analyst and investor sentiment slumped in November (Stuttgart: A0Z24E - news) , the ninth monthly decline in a row. It said political and economic problems in Greece and Italy had raised uncertainty about the future. For details, see [ID:nF9E7JH017]
"The collective markets' greatest fear has materialized: contagion is now reality," said Christopher Vecchio, Currency Analyst at DailyFX.com. "The seven percent threshold was supposed to be the line in the sand that the supranational European body would not allow Italian yields to cross, and for the second time in less than a week, Italian 10-year bonds were above this level."
The euro fell 0.6 percent to $1.3536, having dropped to a session trough of $1.3495 according to Reuters data. Key downside support lies around $1.3481, a one-month low set last week.
The euro zone common currency also lost 0.7 percent to 104.27 yen , after sliding as low as 103.95 -- the weakest since Oct (KOSDAQ: 039200.KQ - news) . 10.
DISORDERLY OUTCOME
The market's optimism over the new technocrat-led governments in Greece and Italy proved short-lived as investors refocused on worries about the ability of European policymakers to contain the deepening crisis, which German Chancellor Angela Merkel called Europe's "toughest hour since World War Two."
Lee Hardman, currency economist at BTMU in London expects the euro to fall to around $1.25 over the next six months, saying there was a risk the market would start to price in a "disorderly outcome" to the crisis.
"The ultimate outcome is still unclear -- whether the euro zone moves closer to fiscal integration or whether there is a more disorderly break-up," Hardman said.
Camilla Sutton, chief currency strategist at Scotia Capital in Toronto, said repatriation flows have temporarily supported the euro, but they will dry up, removing an important piece of support.
Data from the Commodity Futures Trading Commission on Monday showed speculators trimmed bets against the euro in the week to Nov. 8, suggesting the diminishing scope for a short-covering rebound in the common currency. [IMM/FX]
The dollar slipped 0.2 percent to 77 yen , hovering around its 50-day simple moving average at 76.95 yen. It had earlier jumped to a high of 77.51 yen on trading platform EBS.
Traders said investors would likely sell the dollar on rallies as the yen was well-placed to gain in a risk-averse environment despite the possibility of Japanese action to curb the yen's strength.
The dollar climbed to a five-week peak against the Swiss franc . (Reporting by Nick Olivari and Wanfeng Zhou; Editing by Andrew Hay)
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