(Reuters) - The euro slipped to a fresh one-month low against the dollar and the yen on Wednesday as the euro zone debt crisis threatened to engulf top-rated members such as France, as government bonds of core countries came under pressure. The common currency fell as far as $1.3460, its lowest level in more than a month, after the French bond yield spread over benchmark German bunds hit euro-era highs. Italian yields shot back above the critical 7 percent level as the appointment of former EU Commissioner Mario Monti to head a new government failed to quell concerns over the country's long-term political and economic future. "It's not clear if a new government in Italy can carry out measures that would satisfy the market. I would not be surprised if the euro falls to around $1.30 within two weeks," said Masafumi Yamamoto, chief strategist at Barclays. With the currency bloc caught in a vicious cycle of falls in government bonds hurting the region's big banks, further undermining confidence in the area, the euro is coming under heavy pressure. Funding strains among European banks are evident with euro/dollar three-month cross currency basis swap spreads widening to a level not seen since late 2008. The next immediate target for euro/dollar is seen at $1.3405-10, the bottom of the weekly Ichimoku cloud and a 76.4 percent retracement of the pair's rally last month. A break there would open the way for a test of the October 4 low of $1.3145. Daisuke Uno, chief strategist at Sumitomo Mitsui Bank, said the debt crisis that started in Greece two years ago may be festering even Germany. "In the past, the spreads of periphery countries rose as their bond yields rose while German bund yields fell. But these days bund yields hardly fall. What this means is that the debt domino is almost reaching Germany," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank. "I think the ECB is likely to take policy action, probably buying more government bonds and cutting rates, even before the next policy-setting meeting on December 8," Uno added. EUROPEAN CONCERNS A turnaround on Wall Street, which closed in positive territory on the back of stronger-than-expected U.S. data, did not do much to ease fears. "While it is clear that the data in the U.S. is improving, European concerns far outweigh at present," said David Scutt, a trader at Arab Bank Australia in Sydney. "Markets are clearly expecting a circuit breaker to alleviate pressure on periphery bond yields. If no announcement is forthcoming in the days ahead, one suspects that situation could unravel fairly quickly." Political developments in two euro zone hot spots were mixed. In Rome, Prime Minister designate Monti will meet the Italian president on Wednesday to present a new government. But in Athens, Greek conservatives said they would not bow to "dictates from Brussels" over a bailout designed to save their country from bankruptcy and safeguard the euro. The wobbly euro lifted the dollar index .DXY to one-month high of 78.33, well off week's low of 76.751. Broad risk aversion also hit commodity currencies hard, with the Australian dollar falling more than one percent to $1.0074. The dollar held steady against the yen around 77.00, with the threat of more intervention by Japan keeping investors wary of buying the Japanese currency. While U.S. data, including retail sales, offered hopes the world's biggest economy has not lost momentum going into the fourth quarter, euro zone data painted a grimmer picture. The region barely grew in the third quarter, fanning jitters it might slide into recession early next year. Euro zone and U.S. inflation data are next in focus and a stronger-than-expected result for Europe may dim prospects for a follow-up interest rate cut by the European Central Bank. Ahead of that, the Bank of Japan will announce the outcome of its policy setting meeting. Due between 0330 and 0500 GMT (10:30 p.m. and 12 a.m EST), the BOJ is expected to stand pat on policy, having eased just three weeks ago.

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