* Euro falls to 7-week low of $1.3249 versus dollar * Markets rattled by lack of cohesion on how to tackle crisis * Italian yields back under pressure, forcing ECB's hand By Neal Armstrong LONDON, Nov 25 (Reuters) - The euro fell to seven-week lows against a buoyant dollar on Friday and was set to weaken further as disagreement on how to tackle the debt crisis drove borrowing costs to new euro-era highs and boosted demand for liquid assets. Rising Italian government bond yields were seen piling the pressure on to the single currency, with the European Central Bank said to be intervening to try and stem the tide on peripheral sovereign debt. Talks by the heads of Germany, France and Italy on Thursday were overshadowed by German Chancellor Angela Merkel's determined opposition to a joint euro zone bond and a bigger role for the European Central Bank to deal with the crisis. "It seems like the euro zone is at the cliff-face or maybe even falling off," said Jane Foley, currency strategist at Rabobank. "Unless we see firm action from European authorities, the market is betting the worst is about to happen and the dollar is therefore well bid on demand for liquidity." The euro was down 0.7 percent on the day to $1.3249 on trading platform EBS in European trade, its lowest since Oct. 6. Traders said option-related bids were helping to slow the euro's descent after a Scandinavian bank sold the currency aggressively. The dollar rose to a seven-week high versus a currency basket as investors sought the liquidity and perceived safety of the U.S. currency. The euro has shed nearly two percent so far this week, coming under pressure after lacklustre demand at a German bond auction on Wednesday stirred fears the debt crisis now entering its third year might threaten even Europe's biggest economy. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ German auction spells tough times for euro ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ "Merkel sees no scope for euro bonds and the ECB continues to make it clear it sees no scope for financing public debt," said Manuel Oliveri, currency strategist at UBS in Zurich. "As those two factors seem to be the only two options on the table for resolving the crisis, there is not much chance of an improvement in sentiment towards the euro and we think it can go lower from here still." ITALY PRESSURE The next major trough on the euro chart lies at $1.3145, a low hit in early October, while additional support is at $1.3045, the 61.8 percent retracement of the euro's entire 2010-2011 rally. Worries over rising government bond yields of the highly indebted euro zone countries continued to weigh on the euro as Italy's two-year yield rose to a euro era high of 7.72 percent and 10-year yields traded in the area above 7 percent that is seen to be unsustainable. Yields at a 6-month Italian treaury bill auction shot up to 6.504 percent compared to 3.535 percent at the end of October, reflecting market fears over the country's debt burden. The euro also slumped to seven-week lows against the yen around 102.61 yen while the dollar rose 0.4 percent against to 77.35 yen. The risk-off sentiment kept commodity currencies subdued, with the Australian dollar falling 0.4 percent to $0.9686, not far from a seven-week low of $0.9664 set earlier in the week. (Additional reporting by Masayuki Kitano; Editing by Catherine Evans/Ruth Pitchford)

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