* Euro wipes away gains versus sterling * Spanish 10-year bond yields rise above 7 pct * Caution ahead of Wednesday's BoE minutes By Tricia Wright LONDON, June 18 (Reuters) - Sterling reversed earlier losses against the euro on Monday as Spanish borrowing costs soared to levels seen as unsustainable, though expectations of further monetary stimulus by the Bank of England checked the pound's overall gains. The euro was flat against the pound at 80.42 pence, well below a high of 81.11 pence, after Spanish bond yields hit a euro-era high above 7 percent, keeping fears alive that contagion will ensnare larger euro zone economies. The euro retreated from a one-month high against the dollar as initial relief at pro-bailout parties winning in Greek elections, removing the immediate threat of the country leaving the single currency, was replaced by concern over the huge problems still facing the euro zone. With turmoil in the shared currency bloc refusing to wane and little response expected from euro zone policymakers, the Bank of England is likely to ease monetary policy to shore up the UK economy, which is already mired in recession. Traders said the possibility of more quantitative easing (QE) was likely to weigh on the pound, with minutes due on Wednesday from the latest BoE meeting expected to give clues on whether policymakers are leaning towards further stimulus. "Will (QE) be a sterling weakener? On the margins probably more than likely, but overall the toxic legacy from Europe is going to be first and foremost on investors' minds," said Michael Hewson, senior market analyst at CMC Markets. "If overall there's a possibility that Europe will continue to deteriorate then they will put their assets in sterling and the dollar." The BoE last week announced an emergency liquidity package to support the banking system, and Governor Mervyn King suggested more easing could be on its way. More quantitative easing is usually considered bearish for the currency as it increases the supply of pounds in the system. SAFE HAVEN The euro has lost 3.5 percent against the pound this year as investors seeking to exit the euro zone piled into UK gilts, the Swiss franc and government bonds from Scandinavian countries in search of safer places in Europe to park their money. Euro/sterling fell to a 3-1/2 year low of 79.50 pence in mid-May but since then has been stuck in a range between 81.60 pence and 79.50 pence. Market players said a break out to the upside could see it target 82.05 pence - trend line resistance from the November high at 88.30 pence. "Our safe-haven status is still rock solid, but sentiment is probably going to be negative ahead of the next MPC minutes," said Kit Juckes, currency strategist at Societe Generale. "I think there's now a heightened expectation of more from the next meeting so I don't think we're going to turn sterling sentiment around in a hurry, and in that sense I think it'll take a while to squeeze out all the shorts." Against the dollar, sterling was down 0.3 percent at $1.5660, retreating from a near four-week high of $1.5742 hit earlier in the day. Traders cited bids at $1.5620/30 while offers were cited around $1.5730. Latest data from the Commodity Futures Trading Commission showed speculators significantly boosted their bets against sterling in the latest week to 23,112 contracts, the highest since mid-March, from 2,867 a week earlier. (Reporting by Tricia Wright; Editing by Hugh Lawson)

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