* Yen trades near one-month highs vs USD & EUR
* Italy bond auction in focus
* Bernanke 'puts hawks back in cage' - Rabobank
By Ian Chua
SYDNEY, Feb 27 (Reuters) - The yen held near one-month highs on Wednesday, remaining susceptible to bursts of short-covering as political uncertainty in Italy kept the euro under the gun.
Comments from Federal Reserve Chairman Ben Bernanke that eased market concerns of an early end to the Fed's bond buying programme, also somewhat cooled demand for the greenback.
The dollar was at 91.99 yen, up from a one-month low of 90.85 touched on Monday. The euro stood at 120.18, having skidded to 118.74 early this week. Both currencies, however, were still not far from multi-year peaks of 94.57 and 127.71 respectively.
Traders said the Japanese currency was torn between investors wanting to book profits on very bearish positions and those looking to initiate new shorts at these levels.
Investors have been positioning for the Bank of Japan to deliver bold stimulus to defeat deflation. News the Japanese government will this week nominate two doves to head the central bank have strengthened that conviction.
But the cosy trade of shorting the yen was rudely interrupted by the inconclusive election in Italy, which threatened to stall reforms and reignite the euro zone financial crisis.
Italy's borrowing costs have soared on the back of the political stalemate, creating a challenging environment for the country's sale of new 10-year bonds and five-year paper later in the day.
Renewed market angst about the euro zone saw investors quickly switch focus to the euro from the yen. The euro plumbed a seven-week trough around $1.3018 overnight and last traded at $1.3060. The common currency has shed about 5 percent since peaking at a 15-month high of $1.3711 on Feb. 1.
"It seems likely that the stop of 1.2980 on our long EURUSD recommendation (from 1.3180 established last week) is at risk," said BNP Paribas strategist Vassili Serebriakov.
"However we do not believe this is the start of the next round of a Europe-wide debt crisis, given that Italy's overall fiscal position is relatively stable and that investors do not appear to be overweight European assets, which should limit the impact of any unwind."
Renewed European concerns have also taken a toll on commodity currencies, particularly the high-flying New Zealand currency.
Cutting long positions in the kiwi dollar, investors knocked the currency down to $0.8249, well off this month's 17-month peak of $0.8534.
The Australian dollar was not spared, falling to four-month lows of $1.0200, where support emerged. It was last at $1.0232. A clean break below $1.0200 will bring into focus the October low of $1.0149.
There is no major economic news out of Asia on Wednesday, leaving the focus on the Italian bond auction.