By Gertrude Chavez-Dreyfuss NEW YORK, May 25 (Reuters) - The euro tumbled to nearly two-year lows against the dollar on Friday, and remained on track for its worst weekly showing in five months, rattled by fears of a possible Greek exit from the euro zone and the risk other debt-plagued countries could also leave the regional bloc.
A plea from Spain's wealthiest autonomous region, Catalonia, for help from the central government to refinance its debt this year became the latest headline to hit the euro. .
Catalonia's appeal affected almost all asset classes as Spanish and Italian bonds sold off, equities fell, and U.S. crude futures turned negative.
"The Catalonia news was a big deal because it implies that the Spanish government may have to take on more debt and it cannot afford to do so," said Richard Franulovich, senior currency strategist at Westpac Securities in New York.
"It looks like all the euros that were bought need to be resold. For now, it's all about contagion," he added.
In early New York trading, the euro slipped 0.1 percent to $1.2523 , after earlier falling to a nearly two-year low of $1.2495 on trading platform EBS, taking out a key options barrier at $1.25, placing the euro on pace for its worst weekly performance in five months.
The common currency has lost more than 5 percent against the dollar so far this month and is facing its fourth straight week of losses, raising the possibility of a test of the 2010 low of $1.1875.
Macro funds and institutional investors have ramped up euro selling after an inconclusive election in Greece left the country at risk of bankruptcy and a possible exit from the euro zone.
Greeks vote again on June 17, with polls showing a close race between parties supporting and opposing terms of the country's international bailout, keeping markets on tenterhooks.
Investors are also concerned about the health of the Spanish banking sector, chances of a deep and damaging slowdown in the euro area and the lack of any aggressive policy measures to address the escalating debt crisis.
Spanish lender Bankia , which was part nationalised this month, was set to ask the government for a bailout of more than 15 billion (US$19 billion) on Friday. Many strategists expected euro selling to resume next week, although heavy short positioning would slow the momentum.
"We have got a standoff where the market is short and the news is bad and so we have tended to go down in stages," said Kit Juckes, currency strategist at Societe Generale.
"Although it's almost impossible to imagine a set of circumstances where we get good news. The pullbacks in this move down since the break of $1.30 have got really tiny." Investor skittishness was well-reflected in the options market, where euro/dollar one-month implied volatility spiked to 13.13 percent , its highest in more than four months.
With the euro under pressure, the dollar has been the chief beneficiary, with its index against a basket of major currencies edging up to 82.461 , the highest since September 2010.
Against the yen, the dollar was steady at 79.59 yen , supported by Tokyo importers and investors squaring positions ahead of a long weekend in the United States. Sell offers around 80.00 yen were poised to cap any further gains, traders said.
The euro was flat against the Swiss franc at 1.2009 francs, having jumped to 1.20769 francs on Thursday, its highest since mid-March on market talk the Swiss government is going to impose a tax on deposits and chatter that the Swiss central bank initiated a short squeeze in the pair.
Traders said the Swiss National Bank has been buying euros in the past few weeks to protect the floor at $1.20 francs, although some investors were still piling on bets through the options market that the peg will be breached in coming days if the euro zone crisis escalates.
(Additional reporting by Anirban Nag in London; Editing by Theodore d'Afflisio)
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