Euro plummets as dour data raises ECB rate cut talk

NEW YORK (Reuters) - The euro tumbled to a three-week low against the dollar and plunged against the yen on Thursday after data painted a dismal picture of the euro zone's economy, raising the chances of European Central Bank monetary policy action.

Output in the 17 countries that share the euro slid by 0.6 percent in the last three months of 2012, more than the 0.4 percent decline expected in a Reuters poll and deepening its recession.

The bloc's two largest economies, France and powerhouse Germany, also shrank by more than expected in the final quarter, casting doubt on forecasts of a recovery in early 2013.

The German economy contracted 0.6 percent in the final quarter of 2012, the worst performance since 2009, while France's fell 0.3 percent, which was slightly worse than forecast.

The odds of an ECB rate cut this year grew wider, according to Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington D.C.

"Negatives have been on the rise in the euro zone ... in addition to fresh economic jitters, investors are wary ahead of Italy's national elections set for February 24-25," he said.

The euro last traded at $1.3342, down 0.8 percent after earlier hitting a three-week low of $1.3313. That is well below a one-week high of $1.3520 struck on Wednesday and far away from its 15-month high of $1.3711 hit on February 1.

Support was cited at around $1.3260, its 55-day moving average, with stop-loss sell orders below that.

Against the yen, the euro last traded at 124.38, down 1 percent on the day, but above the session low of 123.98 yen.

The euro's decline was "a periodic sell-off," said Neil Mellor, currency strategist at Bank of New York Mellon. "People will look to buy on the dip unless there is more bad data."

Mellor said although the euro would not see a sustained fall just yet, at some point this year it could show consistent losses, judging by the fundamentals in the euro zone.

Peripheral euro zone countries have continued to struggle in the face of tough austerity measures, with Thursday's data showing recessions in Italy, Portugal and Greece had worsened.

The euro is up around 1.1 percent against the dollar and about 8.7 percent against the yen this year, largely a result of an improved appetite for risk and differing global central bank policies.

G20 IN FOCUS

Investors will stay cautious on the euro given the risk of a tough statement on currencies from a G20 summit in Moscow this weekend. Speculation has continued that Japan might come under pressure to slow the yen's slide.

The Group of Seven nations said this week that fiscal and monetary policies must be directed at domestic economies and not at targeting exchange rates.

But confusion reigned after a G7 official said the statement was aimed at Tokyo, a comment that prompted the yen to surge on a volatile foreign exchange market. Other G7 countries later said it should be taken at face value.

Against the yen, the dollar, was down 0.2 percent at 93.18, well below a 33-month high of 94.42 hit on Monday.

The dollar briefly reacted to U.S. data showing the number of Americans filing new claims for unemployment benefits fell more than expected last week.

Earlier, the Bank of Japan kept policy steady as expected and revised up its assessment of the Japanese economy. Some believe the bank may hold off on expanding stimulus next month and wait until its first rate review under a new governor, scheduled for April 3-4.

"With Japan seemingly ground zero of any so-called currency war, backlash could be headed Tokyo's way at this weekend's G-20 summit," said Western Union Business Solutions' Manimbo.

Although yen selling may be poised for a short term reprieve, a bearish trend still appears intact over the medium term and beyond," he said.

(Additional reporting by Anooja Debnath in London; Editing by Nick Zieminski)