* Euro losses deepen as fears of contagion dominate
* Falls to 1-year low in of $1.2936
* Euro down nearly 3 percent on the week
(Adds quote, detail)
By Neal Armstrong
LONDON, May 5 (Reuters) - The euro hit a one-year low on Wednesday as fears euro zone debt problems could spread spooked investors.
The single currency slid to $1.2936, its lowest since April 2009, in European and Asian trade, with analysts and traders citing that month's low of$1.2880-85 as the next target.
A breach there would open the way for a test of $1.25, a level not seen since March 2009.
"The questionable way the Greek crisis has been handled and concerns about the peripherals are weighing on sentiment. I expect euro weakness to remain in place," said Kenneth Broux, market economist at Lloyds Banking Group.
"I see $1.25 as the next big level on the downside," he said.
At 0910 GMT, the euro <EUR=> had recovered slightly in volatile trade to stand flat on the day at $1.2980.
It shed more than 1.5 percent on Tuesday, its steepest one-day loss since last June, on concerns Greece's debt problems would spread to other so-called peripheral economies such as Spain and Portugal.
"Contagion risk is souring sentiment towards the euro," said Adam Cole, global head of FX strategy at RBC Capital Markets.
The cost of insuring Spanish and Portuguese debt against default rose on Wednesday with investor fears centred on contagion risk from Greece to other euro zone states. [ID:nLDE6440IK
Finland's finance minister and IMF chief Dominique Strauss-Kahn, in separate comments, highlighted the danger of Greece's debt crisis spreading. [ID:nLDE644023] [ID:nLDE64409G]
The euro has lost nearly 3 percent this week, as investors remain highly sceptical Greece will be able to carry out the tough austerity measures it promised in return for a 110 billion euro aid package from the European Union and the International Monetary Fund. [ID:nLDE6430PO]
Technical analysts highlighted support at $1.2930, the 78.6 percent retracement of the 2008-2009 rally.
The euro also fell to its weakest against the pound in nearly nine months on Wednesday, stumbling to 85.45 pence <EURGBP=D4>, according to Reuters data, down about 0.2 percent on the day.
Sterling faces its own test this week in a tightly contested national election on Thursday, from which markets are concerned no clear winner may emerge. [ID:nLDE6430DK]
The dollar index <.DXY>, which measures the greenback against a basket of six currencies, rose 0.1 percent to 83.402, after climbing as far as 83.649, its highest since May 2009.
"The dollar is winning largely by default as the other side of the euro trade," said RBC's Cole.
It gained 0.3 percent on the yen to 94.98 yen <JPY=>, pressuring an eight-month high of 94.99 yen struck on Tuesday, with talk of option barriers at 95 yen capping rallies.
Traders said the dollar was also supported by signs the U.S. economy was on the mend. Data released on Tuesday showed pending U.S. home sales rose 5.3 percent in March while factory orders rose 1.3 percent. Both numbers beat forecasts. [ID:nN0498574]
The latest Norges Bank decision on interest rates is due at 1200 GMT. A Reuters poll looks for a 0.25 percent increase in the deposit rate to 2 percent.
The Norwegian central bank has previously said rates will be raised by June, making Wednesday's decision finely balanced.
(Editing by Nigel Stephenson)