LONDON (Reuters) - The euro slipped against the dollar on Tuesday, edging closer to two years lows as investors and speculators sold the common currency on persistent worries over Spain's escalating borrowing costs and its weakening banking sector. Analysts and traders said the euro could weaken to fresh lows in the near term given the extent of the concerns surrounding the euro zone debt crisis and the risk of contagion. Worries about the cost of shoring up Spain's banking system kept Spanish debt yields elevated while the gap between them and German 10-year yields remained near euro era highs, as the risk grew that Spain may be forced to seek an international bailout. The euro traded at $1.2530, off a day high of $1.2575 as demand from corporates and Middle East names faded. Having failed to clear resistance at previous support around $1.2625 for three days in a row, the euro was vulnerable to another test of Friday's low of $1.2495, which marked its weakest level since July 2010. Bids just below $1.25 could offer some support, though further losses could see it drop towards $1.2450, where traders reported stop-loss sell orders. "The widening of spreads between Spain and Germany and Italy and Germany keeps worries about the debt crisis very much alive," said Niels Christensen, currency strategist at Nordea in Copenhagen. "I don't see the euro moving above $1.27. It's only a matter of time before it breaks $1.25. This is psychological support but it's not a big level like the January low was (around $1.2624) and that has clearly broken." The euro gave up most of the gains made on Monday after Greek polls showed more support for pro-bailout parties ahead of the country's election on June 17. That had salved fears Greece may leave the euro zone. PAIN IN SPAIN Many traders expect further downside in the euro as they fear troubles at Spanish banks, hit by a property slump, could further complicate Madrid's efforts to rein in its debt. Spanish 10-year bond yields hovered around 6.5 percent. A level of 7 percent is seen as critical. Euro zone countries that have previously requested bailouts did so soon after their 10-year yields rose above that mark. "The bad news just keeps coming and if Spain were to ask for a bailout we would see the euro come under more pressure," said Steve Barrow, head of G10 currency research at Standard Bank. "The euro remains a currency that is sold at every opportunity. We have revised our three- to six-month forecasts down to $1.15 from $1.20 earlier." Spain's fourth-largest lender Bankia has asked for a bailout of 19 billion euros, in addition to 4.5 billion euros the state has already pumped in to cover possible losses on repossessed property, loans and investments. Prime Minister Mariano Rajoy has ruled out seeking outside aid to revive Spain's banking sector, but many investors are skeptical that this will be possible. Any buying in the euro may be curbed ahead of Ireland's referendum on Europe's new fiscal treaty on Thursday, although the market is cautiously optimistic that the Irish will support the treaty on fear that a "no" vote could add fuel to the fire. Against the yen, the common currency fetched 99.75 yen, not far from a four-month low of 99.37 yen hit last week. The yen, along with the dollar, was supported by the market's risk averse mood. The dollar stood at 79.55 yen, up 0.1 percent on the day and not far from a three-month low of 79.002 yen. (Additional reporting by Anirban Nag; Editing by Louise Ireland)

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