(Reuters) - The euro steadied against the dollar on Tuesday, but sentiment was fragile after comments by Spain's economy minister who tempered expectations of a radical and swift action by European policymakers to contain the worsening debt crisis.
The single currency had gained earlier on talk policymakers were planning to boost the regional rescue fund, halve Greece's debts and recapitalize banks, all of which encouraged profit-taking on short positions after Monday's fall below $1.34.
But the bounce proved short-lived, as Spanish minister Elena Salgado said plans to extend the region's EFSF bailout fund to 2 trillion euros were not on the table.
The euro was last flat on the day against the dollar at $1.3540, above an eight-month low of $1.3360 but staying vulnerable to further falls back toward this trough.
"Salgado poured cold water on the optimism that we saw first thing this morning," said Ian Stannard, head of European currency strategy at Morgan Stanley.
"The market took some relief from reports that European authorities were looking at leveraging up the EFSF, but the reaction (to Salgado) highlights just how fragile that recovery is."
Oscillators such as the relative strength index suggested the euro may be near oversold territory, while traders said investors were still looking to sell the euro on any rally.
Resistance loomed at $1.3580, a 38.2 percent retracement of its September 15-26 decline, while traders reported offers above $1.3550 and more above $1.3570.
But some traders also said with many in the market short of the euro, stop loss orders could be triggered above $1.3590 as investors take profit on those positions.
"A lot of investors are looking to reset new short euro positions around $1.36," said Niels Christensen, currency strategist at Nordea in Copenhagen.
The strategy to sell into a bounce in the euro was widespread as doubts persisted over policymakers' ability to craft a plan quickly to deal with the escalating crisis.
ECB Board member Lorenzo Bini Smaghi said on Monday the existing 440 billion euros in the bailout fund, known as the European Financial Stability Facility (EFSF), might be used as collateral to borrow from the European Central Bank, which would make more money available for crisis-fighting.
Austrian Finance Minister Maria Fekter said euro zone officials are set to discuss next Monday plans to leverage the EFSF.
"The exact terms and the speed at which action could be taken remains uncertain," said Alain Bokobza, head of asset allocation at Societe Generale.
"The latest proposal leveraging the EFSF to boost its firepower to at least one trillion euro is still too hazy to lastingly reverse market sentiment in our view."
Growing expectations that the European Central Bank could cut interest rates were also expected to weigh on the euro. Some ECB officials said on Monday that cuts could not be ruled out.
Higher-risk growth-linked currencies rebounded after a recent sharp sell-off, helped by firmer equities, with the Aussie up 0.65 percent against the U.S. dollar at $0.9905 and the Kiwi up nearly 1 percent.
YEN STILL STRONG
The dollar traded at 76.40 yen, hovering close to record lows around 75.94 yen and keeping alive concerns that Japan could intervene again to stem its currency's gains. The yen has strengthened nearly 6 percent so far this year.
Early on Tuesday, Japan's government said it wanted to bring forward steps to ease the pain some companies feel from a stronger yen and enact the measures before it completes an extra budget to fund reconstruction spending.
"The yen is at levels where you can expect the Bank of Japan to come in. They won't like dollar/yen below 76, so they will be very much on alert," Nordea's Christensen said.
The euro stood at 103.52 yen, having bounced from a fresh decade low of 101.95 yen hit on Monday, weathering some month-end selling from Japanese exporters.
This week the euro zone faces plenty of hurdles, including votes this week in Finland and Germany on existing plans to revamp the EFSF structure. The Greek government votes on Tuesday on new austerity measures needed to secure aid.
The dollar index edged down 0.35 percent to 78.076, off an eight-month peak of 78.863.
(additional reporting by Anirban Nag; Editing by Stephen Nisbet)
