NEW YORK, Oct 3 (Reuters) - The euro fell to an 8-1/2-month low against the dollar on Monday as mounting fears of a Greek default deepened investor concern about the euro zone's banking sector. With Europe still deeply divided over how to tackle the spiraling debt crisis and the risks that poses for the bigger euro zone economies and the financial sector, the euro is likely to stay under pressure, market players said. The euro was down 1 percent at $1.32528 on electronic trading platform EBS, having fallen to a low of $1.32372 -- its lowest since mid-January. Against the safe-haven yen, the euro was down 1.4 percent at 101.677 yen on EBS. Earlier it touched a low of 101.532, the lowest since at least 2004 on EBS. 'The economic and financial climate continues to cool and incertitude will force wary investors to maintain a defensive posture,' said Jessica Hoversen, foreign exchange analyst at MF Global in New York. 'The U.S. dollar will stay the chief beneficiary of the dampened outlook for growth and the escalating crisis in Europe.' Moody's put the rating of financial services group Dexia on review for possible downgrade with the bank looking stretched by its exposure to Greece, raising pressure on its state shareholders to consider a second bailout. For more see. Euro zone finance ministers were meeting on Monday and are expected to put pressure on Greece to implement agreed structural reforms and to discuss options for leveraging the European Financial Stability Facility. That meeting comes after Greece said it would miss a deficit target set just months ago. With the debt crisis showing little sign of abating, the euro zone's manufacturing contraction deepened in September as new orders shrank at their fastest pace since June 2009. Investors are also awaiting a European Central Bank interest rate decision on Thursday. Some market players are expecting it to cut rates by 25 basis points and announce fresh liquidity measures to support the banking sector. The dollar trimmed gains versus the euro on Monday after data showed U.S. factory activity expanded faster than expected in September. EURO SHORT POSITIONS Speculators have been adding to their bearish bets against the euro and this trend is likely to continue. 'The market is short euro and rightly so, with fundamental factors backing it up,' said Chris Walker, forex analyst at UBS in London. 'We could see some short-term unwinding but that will give investors a better level to sell. We expect investors to continue building short positions against the euro.' The options market points to a strong appetite for long-term euro/dollar puts -- bets that the euro will weaken. One-year risk reversal spreads remain near a record high hit recently. The greenback eased 0.4 percent against the yen to 76.699 yen having hit a two-week high at 77.27 yen on EBS. Orders are seen around 77.50, traders said. Tokyo dealers also reported macro funds building dollar long positions and analysts said that if the current crisis deepened, this time the yen could weaken versus the dollar, unlike the global financial crisis in 2008. Concerns about cooling global growth prompted both leveraged and macro funds to unwind positions funded in the dollar and the yen. As a result, the risk-sensitive Australian dollar hit a 10-month low at $0.9578. The Aussie was also hurt by proposed U.S. legislation to raise duties on a small portion of imports from China. Any Chinese-U.S. trade spat would affect exports from Australia to China.

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