* Fears return as Spain may not be able to avoid a costly bailout * Palm oil to test support at 2,970 ringgit -technicals * Prices touch a low of 2,980 ringgit, level last seen on June 28 (Updates prices, adds details) By Chew Yee Kiat SINGAPORE, July 23 (Reuters) - Malaysian crude palm oil futures dropped to their lowest in more than three weeks on Monday, tracking broader financial markets on fresh concerns over Spain's ability to avoid a costly bailout that could worsen the euro zone debt crisis. Risky financial assets including crude oil and grains futures suffered declines as investors liquidated their positions on concerns that the debt crisis could stall global growth and dampen fuel and food demand. Half a dozen local governments were ready to follow in the footsteps of Valencia, which on Friday said it would need help from Madrid, Spanish local media reported. Relentless heat in the U.S. grain belt continued to destroy soybean crops and tighten soybean oil supply but analysts said investors took cues from macroeconomic factors instead. "It's been two weeks that we've been talking about the U.S. weather, so weather risk has already been factored in unless we hear something new coming from El Nino," said Ker Chung Yang, commodities analyst with Phillip Futures in Singapore. "There's news about Valencia seeking bailout that has pushed Spanish bond yields to new high and that could weigh on the market." By the midday break, the benchmark October palm oil futures on the Bursa Malaysia Derivatives Exchange were down 1.9 percent at 2,983 ringgit ($941) per tonne. Prices earlier touched 2,980 ringgit, a level last seen since June 28. Traded volumes stood at 11,912 lots of 25 tonnes each, slightly lower than the usual 12,500 lots. Palm oil will test support levels at 2,970 ringgit per tonne, a break below which will open the way to 2,919 ringgit, said Reuters market analyst Wang Tao. Traders said the weak sentiment was due in part to slow exports and higher production in No.2 producer Malaysia, which could boost palm oil stocks after they fell to a 14-month low in June. Malaysia's palm oil exports fell 23 percent over the July 1-20 period from a month ago, cargo surveyors Intertek Testing Services and Societe Generale de Surveillance said. Exports to China slowed by more than half for the period on high stockpiles and a slowdown in demand after China's economy showed signs of slowing, said a Singapore-based trader. But the market is also watching for signs of El Nino returning to South East Asia as the hot and dry weather could hurt palm oil output for top producers Indonesia and Malaysia. Brent crude slipped to $105 per barrel on Monday as economic concerns returned to the forefront on fresh fears that Spain may not be able to avoid a costly bailout, which could have repercussions on oil demand in the region. Concerns over the euro zone debt crisis also weighed on other vegetable oil markets. By 0513 GMT, the most active U.S. soyoil for December delivery fell 1.4 percent and the most active January 2013 soyoil contract on the Dalian Commodity Exchange lost 1.7 percent. Palm, soy and crude oil prices at 0515 GMT Contract Month Last Change Low High Volume MY PALM OIL AUG2 2955 -55.00 2955 2980 124 MY PALM OIL SEP2 2972 -53.00 2968 3009 1540 MY PALM OIL OCT2 2983 -59.00 2980 3008 7987 CHINA PALM OLEIN JAN3 7902 -172.00 7880 8000 158230 CHINA SOYOIL JAN3 9672 -170.00 9650 9766 276368 CBOT SOY OIL DEC2 54.41 -0.77 54.32 55.29 5302 Palm oil prices in Malaysian ringgit per tonne CBOT soy oil in U.S. cents per pound Dalian soy oil and RBD palm olein in Chinese yuan per tonne Crude in U.S. dollars per barrel ($1=3.17 Malaysian ringgit)

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