NEW YORK (Reuters) - The euro weakened against the dollar on Monday, weighed down by concerns about Greece and Spain's debt problems, although key technical signals and overextended bearish positioning suggested a short-term bounce.
Speculators who had piled up a record amount of bets against the euro cut some of those positions, rising from last week's four-month low and giving the currency a respite from this month's relentless selling.
The euro has fallen in six of the last seven sessions, down nearly 4 percent so far this month.
"Euro/dollar made an important double bottom and the positioning is definitely getting stretched," said Brad Bechtel, managing director, at Faros Trading in Stamford, Connecticut.
"Many will not shake out too much on the positioning given deep imbedded gains, but it is a currency that likes its double tops and bottoms, so we could be in a for a good-sized bounce."
In early New York trading, the euro fell 0.4 percent at $1.2734, well above Friday's low of $1.2640. A break below the nearby 2012 low of $1.2624 would take the shared currency back down to levels not seen since August 2010.
Bechtel said offers on the euro are thick above $1.2880 and above $1.2950.
"I ... still think it (euro) is a sell on rallies, not just against the dollar but also the yen," said Jeremy Stretch, head of currency research at CIBC World Markets.
"That 2012 low is still the target and the euro would need a catalyst for that. That could come if the informal (EU) leaders' meeting this week offers no consensus (on tackling the euro zone debt crisis)."
French President Francois Hollande and some other euro zone leaders are expected to promote the idea of metalized European debt at an informal summit in Brussels on Wednesday, although Germany reiterated its opposition to the idea on Monday.
The euro zone crisis has escalated since inconclusive Greek elections on May 6 raised questions over whether Greece will stay in the bloc. Concerns about the fragility of the Spanish banking sector have also weighed on sentiment.
The Group of Eight leading economies over the weekend, however, backed Greece to stay in the euro zone. The G8 countries also stressed that their "imperative is to promote growth and jobs," which means far less in the way of austerity measures that have plunged some euro zone economies into recession.
The euro drew little support from those comments, with investors viewing the statements as short on detail and long on rhetoric.
Overall, the focus on growth could mean far more involvement of the European Central Bank in terms of stimulus measures, analysts said, and a weaker euro.
Chinese Premier Wen Jiabao called on Sunday for additional efforts to support growth, but concerns about the slowdown in emerging economies remained.
Investors dumped the euro in recent weeks with many seeking the relative safety of the dollar, the yen and even sterling.
The euro was flat against the yen at 100.96, having hit a 3-1/2 month low 100.219 yen on Friday.
The U.S. Commodity Futures Trading Commission said on Friday speculators' short euro positions climbed to 173,869 contracts, the highest on record, while their bets in favor of the dollar against other currencies also rose to a high not seen since at least mid-2008.
"The outlook for the euro is still extremely vulnerable," said Jane Foley, senior currency strategist at Rabobank.
"The market is getting a bit more optimistic ahead of the EU summit and looking for signs policymakers may announce some policies that will support the system. But they won't be able to solve the crisis in one fell swoop."
With sentiment fragile across global markets, investors preferred the safe-haven dollar, which rose 0.4 percent to 79.2 yen, well above a three-month low around 79.00 set on Friday.
Additional reporting by Anirban Nag in London; Editing by Padraic Cassidy