* Euro stable vs dlr as option-related demand supports
* Analysts say respite temporary
* But euro zone financial system strained
* Focus on ECB Thursday rate decision
(Adds quote, updates throughout)
By Neal Armstrong
LONDON, June 9 (Reuters) - The euro steadied on Wednesday on options demand, holding above a recent four-year low against the dollar, but analysts expected only a brief respite as strains in euro zone bond markets hurt sentiment.
Sovereign spreads of countries such as Italy, Spain and Portugal over German benchmarks stayed high, and European banks' overnight deposits with the European Central Bank hit a record, highlighting jitters over the health of the financial system.
German 10-year bond yields DE10YT=RR fell to a record low on Tuesday as investors sought the safety of euro zone benchmark paper on worries about fiscal problems in euro zone countries.
"Sovereign spreads are wide and banks are depositing record amounts with the ECB. There's no relief bounce for the euro and still big animosity towards the single currency," said Kenneth Broux, market economist at Lloyds Banking Group.
At 0930 GMT, the euro was down 0.2 percent EUR= at $1.1950 having hit a four-year low on Monday of $1.1876.
Traders cited option demand related to expiries at $1.1900 and $1.1950. Large option barrier interest was also reported at $1.1850. But analysts said demand for the euro was not sufficient to produce a major bounce.
"There are no major bids for euro/dollar at these levels. We're just trading sideways ahead of the ECB tomorrow," Broux said.
The market will watch for more signals or steps to ease strains from the euro zone's debt crisis or support the economy when the ECB announces its latest decision on interest rates on Thursday [ID:nLDE6560K2].
"The ECB meeting is unlikely to alter the fundamental position of the European banking sector, which has its roots in unrecognised losses and undercapitalisation," Citibank analysts said in a note to clients.
Technical analysts said the outlook for the euro was bearish as it continued to hold below $1.2135, the 50 percent retracement of the 2000-2008 rally.
The euro traded down around 0.5 percent versus the yen EURJPY=R at 109.10 yen, having tumbled to an eight-year low on Monday of 108.06.
Options were also restricting movement in dollar/yen JPY=, which traded down 0.2 percent at 91.40 yen.
"Eighty-percent of the dollar/yen flow seen yesterday was option-related and this is set to continue," said a trader at a U.S. bank in London.
The euro also remained near an all-time low against the Swiss franc, set on Tuesday below 1.3750 francs EURCHF=R, when the Swiss National Bank declined comment on whether it intervened to weaken the franc. [ID:nWEA5363]
The dollar traded with slight losses versus a currency basket .DXY at 88.160 having risen to a 15-month high on Monday as investors sought the relative safety of the greenback and on heightened sensitivity towards riskier assets.
Chinese sources said exports grew 50 percent year on year last month, easing fears that Europe's debt crisis may hit the country's economic growth.
The Australian dollar AUD=D4 pared losses against the U.S. dollar after the report but remained in negative territory on the day.
Market participants will monitor comments from U.S. Federal Reserve Chairman Ben Bernanke at 1400 GMT. Bernanke is scheduled to testify before the House Committee on the Budget at 1400 GMT.
(Editing by Nigel Stephenson)