* Contagion fears to banking system still weigh on euro
* U.S. ISM for May, construction spending for April rise
* Bank of Canada raises benchmark interest rates
* RBA keeps benchmark interest rate steady
NEW YORK, June 1 (Reuters) - The euro fell to a fresh four-year low against the dollar on Tuesday, on signs the euro zone's debt crisis is spreading to its banking system.
The European Central Bank warned on Monday that euro zone banks face up to 195 billion euros in a "second wave" of potential loan losses over the next 18 months due to the financial crisis. The ECB said it had increased purchases of euro zone government bonds. For details, see [ID:nLAG006303]
Stronger-than-expected U.S. manufacturing and construction spending data momentarily boosted stocks and encouraged some investors to briefly leave the perceived safety of the U.S. dollar and the yen, though the positive sentiment waned as the global session wound down in New York.
"The ECB warning on Monday set the stage for euro selling," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. "Markets remain jittery and overall risk sentiment is bearish.
In late afternoon New York trading, the euro was down 0.5 percent against the dollar EUR= at $1.2240 after dropping earlier to a four-year low of $1.2112, according to Reuters data. It fell to $1.2110 on electronic trading platform EBS.
The single currency rose as high as $1.2353 as U.S. stocks advanced in the aftermath of reports showing the manufacturing sector expanded in May for a 10th straight month and April construction spending recorded the largest monthly increase in nearly 10 years. [ID:nN01112488].
The focus will now shift to reports on the U.S labor markets due later this week, and euro selling pressure is likely to continue, analysts said.
STRUCTURAL PROBLEMS, BOC
The euro closed Monday with its sixth consecutive monthly decline against the dollar, the single currency's longest losing sequence since shortly after its inception in 1999. The euro fell over 7 percent against the dollar in May.
Growth concerns were heightened as a survey showed that euro zone manufacturing activity expanded in May at a considerably more sluggish pace than April's 46-month high.[ID:nSLAVGE65K]
"The data just confirmed some of the structural problems Europe is facing," said Strauss at RBC.
Traders said euro/dollar stop-losses were triggered under the previous low at $1.2143, while technical analysts highlighted a break below key support at $1.2135, the 50 percent retracement of the 2000-2008 rally. A daily close below $1.2135 was key for further downside potential, they said.
Talk of a double no-touch option with perimeters at $1.2100 and $1.2500 may also keep the euro range bound against the dollar. The option supposedly expires at the end of the week and the holder may buy and sell to ensure it pays out.
Against the yen, the euro swung between gains and losses but last traded 0.71 percent lower at 111.45 yen EURJPY= after trading as low as 109.77 yen. The dollar was down 0.2 percent against the yen at 91.04 yenJPY=.
Meanwhile, Canada became the first of the Group of 7 major industrialized countries to hike interest rates following the global financial crisis, raising its key rate on Tuesday by a quarter point to 0.50 percent. [ID:nBCL1HE60I]
Still, the Canadian dollar was lower against its U.S counterpart, with the U.S. dollar rising 0.9 percent to C$1.0538 CAD=.
The rate increase had been expected in financial markets, and the Bank of Canada gave no indication it would follow with more hikes.
"The international environment could significantly interfere with future BoC tightening, but under a negative risk scenario the major G4 central banks will not be able to retreat from unorthodox monetary accommodation methods," Alan Ruskin, chief currency strategist at RBS Global Banking and Markets, said in a note to clients.
"In that light, Bank of Canada should look relatively tight (compared with other G4 central banks) whatever the scenario," Ruskin said.
The Australian dollar was down 1.6 percent at US$0.8333 after the Reserve Bank of Australia left Australia's benchmark rate unchanged at 4.5 percent as expected. [ID:nSGE650052] (Reporting by Nick Olivari and Vivianne Rodrigues; Additional reporting by Wanfeng Zhou; Editing by Leslie Adler)