* Euro hits decade low vs yen, then recovers in thin trade * Euro stays under $1.30 vs USD, more falls expected * But substantial short euro positions could limit losses By Jessica Mortimer LONDON, Jan 2 (Reuters) - The euro fell to a decade low versus the Japanese yen on Monday as concerns about the financing needs of indebted euro zone countries continued to weigh on the shared currency, though moves were exacerbated in holiday-thinned trade. The euro fell as low as 98.71 yen on EBS trading platform, its lowest since late 2000, extending falls seen on Friday when it broke below 100 yen to finish the year down around 8 percent. It later recovered to 99.60 yen, with liquidity thin as Asian, British and U.S. markets closed for New Year holidays. Versus the dollar, the euro was at $1.2941, less than a cent above its 2011 low of $1.2858 hit last week. Worries about sovereign debt levels and a lack of policy solutions to the region's 2-year-old debt crisis were expected to push the euro lower in the coming weeks and months. However, the euro's slide may be limited by periodic short-covering rallies as investors unwind hefty bets against the currency, with Commodity Futures Trading Commission data on Friday showing short euro positions swelled to a record in the latest week. "There's still a lot of pressure on the euro due to concerns about the refinancing needs of some euro zone countries in the first quarter," said Arne Lohmann Rasmussen, head of currency research at Danske Bank in Copenhagen. "This is driving many to safer assets and currencies, like the Japanese yen". However, he said the substantial number of short euro positions could limit the euro's falls, potentially enabling it to rebound back above $1.30 versus the dollar, especially if U.S. ISM and jobs data this week point to an improving U.S. economy. Nevertheless, in the absence of a comprehensive European policy response to the debt crisis, the euro could test its 2010 low of $1.1876 next year, some traders said. Policymakers marked the 10th anniversary on Sunday of the introduction of euro notes and coins by urging governments to save and consolidate to overcome their debt crises, while warning 2012 would be harder than 2011. Concerns about the massive task facing European leaders as they struggle to contain the region's debt crisis were highlighted as Spain's new government warned last week its 2011 budget deficit would be larger than expected. A deteriorating euro zone economy will also worry investors, with many anticipating a recession in the region. A survey on Monday showed euro zone manufacturing activity declined for a fifth consecutive month in December. DEBT AUCTIONS EYED From around $1.33 in January last year, the euro soared to $1.4939 by May, then began a steady descent as the crisis that began in smaller countries such as Greece and Ireland spread to the larger core economies of Italy and Spain. Italy, the euro zone's third-largest economy, remains at the centre of the debt crisis, and its borrowing needs could overwhelm the bloc's financial defences if it were forced to seek an international bailout. In the coming months, auctions of euro zone bonds will be closely watched by investors who are nervous that appetite to buy peripheral debt may be waning. "We remain a sell on rallies (with the euro) as we tend to think the euro zone crisis will actually get worse before it gets better," Kathleen Brooks, research director at FOREX.com in a note to clients. The euro's troubles have benefited the dollar and yen, both of which tend to attract safe-haven flows in times of trouble. Against a basket of major currencies, the dollar was up 0.1 percent at 80.237, having hit a near one-year high of 80.854 last week. The dollar fell to a one-month low against the yen of around 76.30 yen. Still, questions remain about the strength of the U.S. economy and whether the Federal Reserve will opt for a third round of monetary easing to boost lending and growth. Sterling dipped 0.25 percent to $1.5496, while the Australian dollar was steady at $1.0220.

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