The euro held near a 17-month low versus the dollar and hit an 11-year low against the yen on Monday as mass downgrades of euro zone states threatened the lending capacity of the euro zone's bailout fund and with Greece's future in the bloc unclear.

As Standard & Poor's downgraded nine euro zone countries, including France, talks between Greece and private creditors on a debt swap deal broke down, raising the risk of a messy Greek default and dousing last week's glimmers of optimism.

The euro's falls were not precipitous, however, with market participants saying the S&P downgrades had been well-flagged, but there were concerns the bloc's EFSF bailout fund may also lose its triple-A rating with S&P.

"The rating of the euro zone bailout fund needs to be watched closely as do the Greek PSI negotiations and we are expecting the euro to remain under pressure,» said Ian Stannard, head of European Research Strategy at Morgan Stanley.

The euro was down 0.1 percent against the dollar at $1.2667, vulnerable to a test of Friday's 17-month low of $1.2624. Trading volumes were reduced with U.S. markets shut for a public holiday while traders said European Central Bank buying of Italian and Spanish debt had provided some support.

Traders reported an option barrier at $1.2600 and stop loss orders around that level. A break below there would see the euro target its August 2010 low of $1.2588.

"All the signals from S&P were that the crisis will get worse before it gets better and I struggle to find an argument for not being short of euro/dollar at the moment,» said Niels Christensen, currency strategist at Nordea in Copenhagen.

"It is difficult to see that any event will ease fears about the euro zone debt crisis».

Trendline support connecting the euro's July 2001 low, early 2002 troughs and its June 2010 low stood around $1.25. However, analysts said a lack of technical support below there meant the euro could quickly fall towards $1.20 and the 2010 low around $1.1875 once it falls below $1.25.

The euro fell 0.3 percent to 97.23 yen, near an earlier 11-year low of 97.04 yen hit on trading platform EBS, with traders citing euro selling by Japanese exporters. It stopped shy of strong option barrier support at 97.00 yen and large stop-loss orders below.

"We think euro/yen could be about to move significantly lower and have a target of 93.50 yen,» said Stannard.

With speculators' euro short positions at record levels, the single currency may gain some respite as investors take profit on those positions.

However, any such rallies were expected to be limited, with investors keen to put on fresh shorts.

The euro's drop against the yen prompted Japanese Finance Minister Jun Azumi to say he was worried about the euro's fall, adding currency moves had been «a little rapid».

But analysts at Citi played down the possibility of yen-selling intervention against the euro.

"Due to the economic slowdown in Europe, exports to Europe from Japan have been sluggish, suggesting that the magnitude of the currency impact may be somewhat smaller,» Citi analysts Osamu Takashima and Issei Suzuki said in a research note.

With the euro under pressure, the dollar index .DXY reached a high of 81.702, within easy reach of a 16-month peak at 81.784 hit late last week, before easing to 81.473.

The dollar, however, slipped 0.2 percent against the yen to 76.73 yen, with traders citing Japanese exporter selling.

Traders have said market wariness toward the possibility of yen-selling intervention may increase if the dollar were to threaten to breach 75.00 yen.

Against the Swiss franc, the euro edged up to 1.2090 francs, with traders seeing a possibility it may test the Swiss National Bank's floor of 1.20 francs. Near-term support was expected from an options barrier at 1.2050 francs. [Reuters - kathimerini]