* Euro slips broadly, dollar funding remains tight
* Fed's Bernanke: Dollar swap facilities not permanent
* Euro pares losses as stocks rally but risk aversion high
(Adds comment, updates prices)
By Naomi Tajitsu
LONDON, May 26 (Reuters) - The euro slipped across the board on Wednesday, prodded lower after Federal Reserve Chairman Ben Bernanke highlighted the possibility that the U.S central bank's dollar funding facility would not last forever.
The single currency trimmed losses as European shares rallied, but its recovery was dashed after a poorly received German debt auction underlined overall negative sentiment on the euro zone.
Speaking in Tokyo, Bernanke said dollar swap lines, which were reinstated as a Greek debt crisis escalated, played an important role in stabilising markets, but that the Fed did not want to provide a permanent service. [ID:nTOE64P01H] While many in the market acknowledge the funding cushion is temporary, analysts said Bernanke's comments were keeping risk aversion high and helping to keep sentiment negative on the euro, which hovered near a four-year low versus the dollar. "There seems to be scepticism in the market about how long or how large swap facilities will continue to be," said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt. "The possibility of a test of the downside level in euro/dollar is more strong than a test of the upside," he added.
Signs of tighter funding, with costs for banks to borrow dollars in the interbank market hitting 10-month highs this week, are driving investors to the relative safety of U.S. dollars, away from risky assets and currencies. [ID:nLDE64O1MP]
This has been driven by uncertainty about how debt problems in Greece and other euro zone countries will impact the global economy.
Traders said weak demand at an offer of five-year German government bonds on Wednesday was keeping the euro under selling pressure. [ID:nLDE64P0QO]
By 1003 GMT, the euro <EUR=> had slipped 0.4 percent on the day to $1.2315, having hit a session trough of $1.2263. A fall below $1.2143 touched last week would mark its weakest since April 2006.
Short covering since last week has kept the euro away from that level, and Nomura currency strategist Ned Rumpeltin said position adjustments may drive the currency as high as $1.26 before it resumes its downtrend towards $1.20.
"We're in a consolidation mode. While additional negative developments can spark another wave of risk aversion at any time, we're looking for a few more days of letting the market catch its breath," he said.
Against the yen, the euro was down 0.5 percent at 111.13 yen <EURJPY=R>. On Tuesday, it tumbled to 108.83 yen on trading platform EBS, its lowest since November 2001.
The euro recovered from the day's low versus the dollar and the yen as European shares <.FTEU3> rallied 2 percent and U.S. stock futures <SPv1> rose 0.6 percent.
Some analysts said equity moves reflected short covering following recent losses, rather than improving risk demand.
Higher-risk currencies including sterling and the Australian and New Zealand dollars slipped against the U.S. currency, but trimmed losses as stocks rose. This nudged the dollar <.DXY> 0.1 percent lower versus a currency basket to 86.684.
Market participants say credit tightness has been less severe than was seen after the Lehman shock in 2008.
But fresh memories of the global credit crunch are making financial institutions cautious about lending to those who may have big exposure to debt-ridden countries or banks in the euro zone, traders say.
The Bank of Spain's weekend takeover of savings bank CajaSur kept investors determined to cut risky trades as the move fanned fears more banks may need to be bailed out by euro zone members.
(Editing by Nigel Stephenson)