LONDON (Reuters) - The euro held near two-year lows versus the dollar on Wednesday as it emerged there would be no quick resolution to a German court hearing on activating euro zone bailout funds, adding to unease over how policymakers will tackle the debt crisis. Some market players had been hoping for a quick ruling from Germany's Constitutional Court on whether the European Stability Mechanism (ESM) and planned changes to the euro zone's budget rules were compatible with German law. But the decision looked likely to take several weeks, with Finance Minister Wolfgang Schaeuble saying he hoped a judgment would be passed before the autumn. Without German backing, the ESM, originally meant to start on July 1 and then delayed to July 9, cannot be launched. Although the euro held steady above Monday's two-year low of$1.2225, analysts said a rise in Spanish and Italian government debt yields could fuel concerns about political hurdles and skepticism over the euro zone's decision-making process. The single currency was last up 0.1 percent at $1.2260. A break below Monday's low would open the door to a test of the June 2010 trough of $1.1875. "People will be aware the non-decision we have got (from the court) might be a severe problem if yields really pick up and then euro/dollar will come under pressure," said Lutz Karpowitz, currency strategist at Commerzbank. Ten-year Spanish bonds were trading near the 7 percent level that triggering an upward spiral in yields for bailout recipients Ireland and Portugal, while Italian yields hovered around 6 percent. Italian Prime Minister Mario Monti said on Tuesday Italy could be interested in tapping the euro zone's rescue fund to ease its borrowing costs. Some market players said there was room for the euro to edge higher against the dollar in the near term but its outlook was gloomy. "While the euro could see some short-term corrective moves against the dollar, it is really difficult to think of taking long positions in the coming months, considering Europe's situation," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo. Euro zone finance ministers meeting earlier this week failed to provide much reassurance. While the ministers agreed to grant Spain an extra year to reach deficit reduction targets, they did not come up with a final figure for aid for the country's ailing lenders. A rate cut by the European Central Bank last week also removed a pillar of support for the euro, increasing chances it could replace the yen or dollar as a "funding currency" for buying higher-yielding assets. The euro fell to five-week low against the yen on EBS at 97.10 yen, before paring losses to last trade flat at 97.30. Market players said support lay at 97.02 yen, the 76.4 percent Fibonacci retracement of the euro's June move from 95.59 to 101.63 yen, with bids also cited at that level. FED MINUTES EYED The dollar dipped against the yen to 79.30 yen, with support at its 200-day moving average at 78.99, as investors awaited the outcome of the Bank of Japan's regular two-day policy meeting beginning on Wednesday. The BoJ is expected to hold off on easing monetary policy despite moves in that direction last week by the central banks of Europe, Britain and China, convinced that Japan's economy is still on track for a moderate recovery. Market players were also looking ahead to the release of minutes from the U.S. Federal Reserve's June meeting. Any indication the Fed may opt for another round of asset buying before the end of the year could weigh on the dollar against perceived riskier currencies. Lackluster updates from a number of U.S. companies cast a shadow over the upcoming earnings season and compounded concerns sluggish world growth was hitting profit growth. The Australian dollar rose 0.4 percent against the U.S. currency to US$1.0206 and also traded near an all-time high against the single currency of A$1.1974. (Additional reporting by Lisa Twaronite; Editing by John Stonestreet)

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