* Euro languishes at four-month lows vs USD
* Risk appetite fades on Cyprus deal fallout
* BOJ governor parliamentary testimony next in focus
By Ian Chua
SYDNEY, March 26 (Reuters) - The euro nursed heavy losses early in Asia on Tuesday, having suffered a steep drop across the board on fears that future bank rescues in the euro zone would come with the same stern conditions seen in Cyprus' deal.
The common currency traded at $1.2854, near a four-month trough of $1.2829 plumbed overnight and closer to retesting the November low of $1.2661. It has fallen more than 6 percent from a peak of $1.3711 reached on Feb. 1.
The euro had initially risen on Monday after Cyprus clinched a last ditch deal with international lenders to avoid a banking collapse.
But it quickly went into reverse gear when the head of the Eurogroup, Jeroen Dijsselbloem, said the rescue plan will serve as a model for dealing with future banking crises. He later appeared to backtrack, saying Cyprus was a specific case with exceptional challenges.
"While these comments were partly retracted, markets have interpreted the message as an indication that private sector bail-ins will need to play a greater role in any future bail outs," said Vassili Serebriakov, strategist at BNP Paribas.
Adding to the euro's woes, there was speculation of a credit rating downgrade for Italy, which is still struggling to form a government after inconclusive elections last month. Moody's rates Italy Baa2, two notches above junk status, with a negative outlook.
Those factors combined saw the euro lose ground against the yen, sterling, Swiss franc and the Australian dollar as well. The euro plumbed a one-month low of 120.08 yen before steadying near 121.00. Support is seen around 118.74, the 2013 trough.
Renewed pressure on the euro helped lift the dollar index towards a 7-1/2 month peak of 83.166 set earlier this month. It last stood at 82.886.
On the yen, the dollar fetched 94.19, still searching for fresh impetus after its six-month rally to a 3-1/2 year peak of 96.71 on March 12 came to an abrupt halt.
Investors had sold the yen on anticipation of more aggressive policies from the Bank of Japan to defeat deflation once and for all.
Many expect the bank will expand its stimulus programme at the next scheduled meeting on April 3-4, or even earlier, and will be keenly watching new BOJ governor Haruhiko Kuroda's parliamentary testimony later in the day.
In contrast, Australia's central bank has shifted to a wait-and-see stance and a speech by Reserve Bank of Australia governor Glenn Stevens around 0445 GMT will be watched for any changes to the bank's position.
The Australian dollar has been well supported by the central bank's cautiously optimistic view on the local economy and further underpinned overnight as investors dumped the euro.
It last traded at $1.0462, having touched a two-month high of $1.0480.