* Euro hits 10-year low vs yen; near 1-year low vs USD * Italy sells bonds, but borrowing costs stay elevated * Euro could drop further as $1.30 now seen as resistance * But yr-end demand for euros may temper near-term falls By Jessica Mortimer LONDON, Dec 29 (Reuters) - The euro fell to a 10-year low against the yen and its lowest in nearly a year versus the dollar on Thursday on worries about the euro zone debt crisis as borrowing costs at a sale of Italian bonds stayed very high. Italy sold 7.02 billion euros of three to 10-year bonds. Yields were lower than at previous sales but cautious investors still demanded a near 7 percent yield to buy 10-year paper, a level seen unsustainable. The euro was at $1.2881 against the dollar, its weakest since Jan. 10, when the euro hit its 2011 low of $1.2860. Trading was thin, however, with individual orders exaggerating moves. Analysts said that with the euro having broken decisively below $1.30, this level would act as technical resistance, with many expecting a move towards $1.25 in the coming months. "The euro remains biased towards the downside, not just from a debt crisis perspective, but also from a fundamental perspective, with the European Central Bank expected to move towards more aggressive quantitative easing," said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank. "The Italian auction result was not a disaster, yields were lower but the bid-to-covers were a bit weaker, so it's certainly not an all-clear on the debt crisis." Against the yen, the euro hit a 10-year low of 100.28 yen on the EBS trading platform, driven by selling from Japanese retail investors and exporters, with moves amplified in poor year-end liquidity. There was market talk of an option barrier at 100.00 yen, suggesting the euro could draw support from demand from options players just above there. However, its falls may gain momentum if that level is breached, with one trader saying there were large stop-loss euro offers at 100.00 yen. Analysts said the euro was likely to stay vulnerable to further falls as the debt crisis in the region remains acute. "The trend is still there for a weaker euro," said Carl Hammer, currency strategist at SEB in Stockholm, adding SEB sees the euro at $1.25 by the end of the first quarter of 2012. "Italy have a massive refinancing need early next year and markets are a bit worried about it". However, he said year-end flows tend to be negative for the dollar, and this could temper euro falls versus the U.S. currency before the New Year weekend, while traders cited some talk of euro zone exporter demand to buy euros. The euro's drop helped lift the dollar to 80.729 versus a basket of currencies at one point, near an 11-month high of 80.730 hit in mid-December. It was last at 80.751. The greenback eased 0.15 percent to 77.81 yen. The euro extended falls on Wednesday, when investors were spooked by European Central Bank data showing euro zone banks deposited a record 452 billion euros with the central bank. Signs banks were hoarding cash came just days after the ECB provided them almost half a trillion euros worth of three-year loans at cut-rate prices to encourage lending. The new data suggested European banks are still distrustful of lending to each other, preferring to deposit money with the ECB.

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