* Greek draft budget forecasts bigger deficits than targets * Euro hits 8-mth trough as macro funds sell; more downside seen * 1-yr euro/dlr risk reversals loom near record highs By Anirban Nag LONDON, Oct 3 (Reuters) - The euro hovered near an eight-month trough against the dollar and a decade low against the yen on Monday, as mounting fears of a Greek default deepened investor worries about the health of the euro zone's banking sector. With Europe still deeply divided over how to tackle the spiralling debt crisis and the risks that poses for the bigger euro zone economies and the financial sector, the euro is likely to stay under pressure, traders said. The euro was down 0.4 percent at $1.3332 , having fallen to a low of $1.3313 -- its lowest since mid-January. The shared currency?lost 7 percent in September -- its largest monthly drop since November 2010. Traders cited talk of option barriers at $1.3300, $1.3275 and $1.3250. Against the safe-haven yen, the euro was down 0.6 percent at 102.50 yen , not far from its decade low of 101.95 struck on trading platform EBS late last month. Stocks, commodities and high-yielding currencies ground lower on expectations of cooling global growth, prompting both leveraged and macro funds to unwind positions funded in the dollar and the yen. As a result, the risk-sensitive Australian dollar hit a 10-month low at $0.9592 . European shares fell with banking stocks coming under fresh pressure. Moody's said it was reviewing the ratings of troubled financial services group Dexia for possible downgrade, highlighting the troubles of the banking sector. French daily Les Echos reported Belgian and French finance ministers will meet on Monday to discuss ways to shore up the balance sheet of Dexia, reminding investors of the problems euro zone banks face due to their exposure to peripheral debt. "Euro zone banks remain a big issue and we expect the euro's downside to continue," said George Saravelos, G10 FX strategist at Deutsche Bank. "But the focus will shift to monetary policy and growth this week. There is a chance that there could be a short squeeze in the euro in the near term if the European Central Bank does not provide the support some investors are looking for." The ECB meets this week and some investors are expecting the central bank will cut rates by 25 basis points. Concerns about the funding outlook for European banks could add to calls for more liquidity measures from the ECB this week and also instill some urgency to the discussion among policymakers about beefing up the euro zone's rescue fund. Euro zone finance ministers hold a meeting later and are expected to put pressure on Greece to implement agreed structural reforms and to discuss options for leveraging the European Financial Stability Facility (EFSF), to increase its financial firepower. That meeting comes after Greece said it will miss a deficit target set just months ago. With the debt crisis showing little signs of abating, the euro zone's manufacturing contraction deepened in September as new orders shrank at their fastest pace since June 2009. Factory activity in some Asia's biggest economies also slumped to levels last seen during the worst of the global financial crisis, data released on Monday showed. EURO SHORT POSITIONS Speculators have been adding to their bearish bets against the euro and this trend is likely to continue. "The market is short euro and rightly so, with fundamental factors backing it up," said Chris Walker, forex analyst at UBS. "We could see some term unwinding, but that will give investors a better level to sell. We expect investors to continue building short positions against the euro." The options market points to a strong appetite for long-term euro/dollar puts -- bets that the euro will weaken. One-year risk reversal spreads continued to widen and hit a record high around 4.0 at the end of last week and still stand near that level. The euro's losses saw the dollar index rise to an eight month high of 79.154. It was last up 0.6 percent at 79.026. Currency speculators increased bets on the U.S. dollar to their highest since June 2010, and Saravelos at Deutsche reckons more bullish positions could be added in the coming weeks. The greenback eased on the yen to 76.90 yen, having hit a two-week high at 77.27 yen and breaking above its 55-day moving average at 77.17 for the first time since its spike after intervention on Aug. 4. Stop losses loom around 77.30 yen, while orders are seen around 77.50, yen traders said. Tokyo dealers also reported macro funds building dollar long positions and analysts said that if the current crisis deepened, this time the yen could weaken versus the dollar, unlike the global financial crisis in 2008. (Editing by John Stonestreet/Ruth Pitchford)

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