* Euro slips after last week's short-covering rally
* Spain's takeover of small bank keeps investors jittery
* IMM speculators trim record short euro positions (Recasts, adds comment, updates prices)
By Wanfeng Zhou
NEW YORK, May 24 (Reuters) - The euro fell against the dollar on Monday, stung by a new round of worries that the euro zone's debt crisis could spread after Spain's central bank took over a small savings bank.
The Bank of Spain on Saturday said it had taken over savings bank CajaSur following the failure of its planned merger with another regional lender. The news caused the euro to retreat from last week's gains. For more, see [ID:nLDE64L007]
Although CajaSur is relatively small, analysts said the bailout highlighted weakness in the European banking sector and fueled worries that other savings banks could require money at a time when Spain is trying to slash government spending and repair public finances.
It is "a sign that sovereign debt risk is spreading from the public to the private sector," said Dan Cook, a senior market analyst at IG Markets Inc in Chicago.
"This move further highlights the risk to, and weakness in, the European banking sector. The liquidity issues faced by financial firms in many areas in Europe by itself would be enough to slow growth prospects across the region," he added.
In late New York trading, the euro <EUR=> was down 1.5 percent on the day at $1.2383. It fell 1.1 percent versus the yen <EURJPY=R> to 111.88 yen.
Traders said the euro's losses accelerated after stop-loss orders were triggered under $1.2480. European banks and Asian central banks were also seen selling the euro in quiet trade, with many European markets closed for a holiday.
Support is seen around $1.2135, the 50 percent retracement from the euro's all-time low to its all-time high. Last week, the euro fell to a four-year low of $1.2143 before recovering.
"The Spanish news is not really a big story, but it does highlight that there are a lot of cracks in the financial system," said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto. "The concern is that if these cracks get bigger, the question is, 'Who would be able to contain it?"
The euro had hit around $1.2670 on Friday. It rallied last week as investors exited short positions in the single currency, partly on speculation the euro's dramatic decline in recent weeks could prompt central banks to intervene to prop up the currency.
Commodities Futures Trading Commission data shows IMM speculators had by early last week cut back slightly on record bets the single European currency will weaken. [IMM/FX] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For the chart on the latest data on euro positioning, click here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Those positions have ballooned in past months, pushing the euro lower against the backdrop of Greece's debt crisis, which has threatened to spread to Spain and Portugal and raised concerns about the euro's stability.
"The euro is lower against every major currency as last week's short-covering rally has clearly ceased," said Andrew Busch, global FX strategist at BMO Capital Markets in Chicago. "It feels like a 1.2200-1.2700 range is what we're going to experience through the U.S. release" of nonfarm payrolls data in early June, he added.
Data released on Monday that showed U.S. existing home sales rose more than expected in April briefly pushed the euro to session lows against the dollar around $1.2345, according to EBS data. See [ID:nN24249105]
Liquidity has dried up, leaving investors scrambling for safe-haven dollars. This helped to boost the dollar roughly 1.1 percent higher against a currency basket <.DXY>.
Against the yen, the dollar rose 0.4 percent to 90.36 <JPY=>, while sterling was down 0.2 percent at $1.4433 <GBP=>. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)