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LONDON (Reuters) - The euro sank to a 23-month low against the dollar on Friday and hit its weakest in more than a decade versus the yen as investors ditched the single currency due to escalating concerns about Spain's banking sector.
Japan stepped up warnings that it could intervene to curb the safe-haven yen's recent climb, saying the rise was being driven by speculators and that it would act decisively if excessive market moves continued.
The euro fell to a low of $1.2312 on trading platform EBS, its weakest since July 2010. It last fetched $1.2321, down 0.3 percent on the day, with a drop towards $1.20 likely as "bears" - betting on more weakness - remained firmly in control.
The drop in the common currency came as Spaniards sent money abroad in droves, worried about the health of the country's banks. Bank of Spain data showed a net 66.2 billion euros ($82.0 billion) was sent abroad in March, the most since records began in 1990.
"It is looking very bearish for the euro with the latest capital flows data showing a significant amount leaving Spanish banks, all of which indicate they will probably need official help," said Peter Kinsella, currency strategist at Commerzbank.
Any help from the European rescue fund for Spain would mean an additional tax burden on Germany, Europe's paymaster, and could hurt the safe-haven status of German bunds, he added.
"It is not a situation where there is much help for the euro and chances are it is headed towards $1.20."
With German two-year bond yields falling below zero for the first time, traders said a lot of safe-haven flows have, so far, stayed within the single currency area. But if that were to change, the euro's decline against the dollar and the yen could accelerate considerably.
The euro's selloff has gained steam this week as Spain's borrowing costs surged on worries it may need to issue more debt to recapitalize its banks, adding stress to markets already frayed by anxiety that Greece may exit the euro zone.
Rising costs of funding for the government risk pushing Spain towards an international bailout. The euro has fallen almost in lock step with the yield spread between Spanish 10-year government bonds and German Bunds which hit its widest levels in the euro-era this week. <GVD/EUR>
A rush towards safe-haven currencies saw the dollar index .DXY rise to a 21-month high of 83.393.
These flows also helped the Japanese yen. The euro slipped against the yen to a new 11-1/2-year low of 96.168 yen on EBS with traders citing automatic stop-loss orders triggered below 96.40 yen.
So far the European Central Bank and euro zone leaders have resisted pressure to respond to the growing crisis. But markets remain wary that, with bearish positions at stretched levels, a policy response was increasingly likely and could spark a sharp reversal.
"They've got to act because markets are melting down," said Gavin Friend, currency analyst at NABCapital.
He added that with EU leaders not scheduled to meet until later this month, the ECB was the body most likely to react with some measure to cool the tension - possibly by reactivating its bond-buying program.
"If it were to happen right now, we'd be at $1.25 - $1.26 by the end of the day and you'd see a big fall in Spanish yields. But it would only buy time because it's not a resolution, it's a sticking plaster."
The risk of contagion will continue to support the safe-haven yen making players wary about the potential for official intervention to sell the yen, traders said. The Japanese currency's has surged this week, rising to a 3-1/2-month high versus the dollar.
The dollar fell to 78.105 yen on trading platform EBS, its lowest since February 14 when the Bank of Japan surprisingly eased monetary policy and sent the yen lower.
Traders say the dollar could come under renewed pressure against the yen if U.S. jobs data due later in the day comes in weak. The data is expected to show U.S. employers created 150,000 jobs in May.
additional reporting by Anirban Nag; editing by Patrick Graham