* Euro pulls away from two-week high vs dollar * Euro burdened by heavy political, debt auction schedule * Yen rebounds, speculators' short positions remain high By Anirban Nag LONDON, April 23 (Reuters) - The euro retreated from two-week highs against the dollar on Monday on worries the euro zone debt crisis could ensnare higher-rated countries, with gloomy economic prospects and rising political risks likely to keep it under pressure. Analysts said sentiment towards the common currency was bearish with most investors looking to sell it at higher levels before debt auctions this week in Italy and the Netherlands. The Dutch government was on the verge of collapse after it failed to agree on budget cuts, while Italian bond yields surged as did French borrowing costs after Socialist Francois Hollande - who has promised to renegotiate a European budget pact - won the first round of France's presidential poll. The euro fell 0.6 percent to $1.3145 and held below Friday's peak of $1.3225 logged after a near 1 percent rally in the week, its best since late February. Traders cited sell-stops below $1.3130 with near-term support at its 100-day moving average around $1.3120. Most traders expect the euro to trade in a roughly $1.3000 to $1.3300 range with worries about feeble euro zone growth likely to dominate sentiment. Data showing Germany's manufacturing sector unexpectedly shrank at its fastest pace in nearly three years in April helped drag the currency lower. Overall, the latest euro area PMI surveys cast fresh doubts on whether the region could emerge from a slowdown in the face of severe fiscal tightening. "It has not been a great start for the week for the euro with German PMI numbers adding to the worries stemming from the political risk factors," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "If bond spreads continue to widen and stock markets come under more pressure, we could see the euro drop towards $1.3050 rather than head towards $1.3250 in the near term." The euro got limited support from a weekend deal to double the International Monetary Fund's firepower to contain the debt crisis. Analysts said the French election first round results could raise doubts about whether euro zone states will stick to austerity measures and could push sovereign debt yields higher. POLITICAL RISK FACTORS LOOM The French run-off vote coincides with a parliamentary election in Greece, where support for the two main pro-bailout parties is at historic lows, though they could eke out a narrow majority. There is also an Irish referendum on a euro zone fiscal compact agreement on May 31. And the Netherlands, a core euro zone member, looks set to face new elections after talks on budget cuts collapsed over the weekend. That saw the yield spread on triple-A rated Dutch bonds over German paper move out to its widest in three years while the Italian debt yield spread also increased. Both the Netherlands and Italy hold bond auctions on Tuesday. The pullback in the euro pushed the dollar index higher to 79.488. The dollar could gain further if Federal Reserve policymakers bring forward their projection on when the Fed should start raising interest rates at its two-day policy meeting starting on Tuesday. But that is far from assured as Chairman Ben Bernanke will probably try to quash any speculation about an early rate hike and possibly leave the door open for more stimulus. The dollar shed 0.7 percent against the yen to trade at 81 yen. But yen gains were seen as limited before a Bank of Japan policy meeting on Friday, which is expected to adopt fresh easing steps. "Dollar/yen is consolidating and any drop to 80 yen is a good level to go long on the dollar for a move to 85 yen," said Stuart Frost, head of Absolute Returns and Currency at fund managers RWC Capital. "We are positioned for that." Traders said the yen's bounce on Monday was partly due to options-related buybacks. Data published late on Friday by a U.S. financial watchdog showed speculators' net yen positions remained high, raising caution about a possible pullback. (Editing by Nigel Stephenson)

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