* Euro falls, erasing earlier gains as Spain worries grow
* Spain's Montoro says financial markets closing to Spain
* Focus turns to ECB and Fed meeting (Updates prices, adds quotes)
By Julie Haviv
NEW YORK, June 5 (Reuters) - The euro dropped against the dollar on Tuesday as fears over Spain escalated after the country warned about its access to credit markets and a meeting of Group of Seven finance chiefs offered no action to assuage investors.
Spain's treasury minister, Cristobal Montoro, said that at current interest rates, financial markets were effectively shut to Spain. The news on Spain, the euro zone's fourth biggest economy, eclipsed the worries over Greece ahead of new elections there later this month.
The euro, which rallied on Monday on optimism the G7 meeting would introduce fresh measures, fell broadly after the G7 ministers failed to unveil concrete actions to address the problems in Spain and Greece.
"The need for Spanish banks to be recapitalized has taken precedent over the Greek (election) outcome," said Chris Fernandes, vice president, senior foreign exchange adviser for the capital markets division at Bank of the West in San Ramon, California.
Tuesday's G7 talks prompted some market players to speculate that the European Central Bank could opt for some form of further monetary stimulus when it meets on Wednesday. A recent Reuters poll showed only 11 out of 73 analysts polled expected a move this month.
Fernandes said euro/dollar should remain under pressure over the next month until the Greek elections on June 17, the scheduled meetings of the European Union finance ministers on June 21-22 and a meeting of EU leaders on June 29-30.
"However, due to the current extreme levels of speculative short euro positions in the markets, there will be sharp rebounds from time to time as traders book their profits and look for perhaps higher levels to sell the euro/dollar."
The single currency was last down 0.4 percent at $1.2452, well above Friday's two-year low of $1.2286, using Reuters data.
"People will be happy to sell into moves above $1.25," said Anders Soderberg, currency strategist at SEB in Stockholm.
The euro has recovered somewhat against the dollar since weak U.S. jobs data on Friday fed speculation about the prospects for further monetary easing by the U.S. Federal Reserve. Soderberg, however, said the move in the euro was merely "a short-term break in what now seems to be a well-established downtrend.
Fernandes, who helps oversee the $10 billion in assets under management at Bank of the West's capital markets division's, which includes currencies, said his anticipated downside target for the EUR/USD is just below $1.2200.
"But I don't see it going much lower than that in the interim, due to stretched market positions and the possibility of a rumored 'grand plan' for the euro zone, which would address the immediate banking crisis in Spain and perhaps also provide some more measures aimed at fiscal consolidation."
Against the yen, the euro was last up 0.2 percent at 98.04 yen, above Friday's low of 95.57 yen, using Reuters data, the lowest since December 2000.
After this week's ECB meeting, markets will shift focus to testimony on Thursday by Fed Chairman Ben Bernanke before the U.S. Congress. Traders will look for any hints on the possibility of more quantitative easing, a negative for the dollar.
The dollar got a boost after Japan's finance minister, Jun Azumi, said a strong yen is damaging Japan's economy.
The dollar was up 0.5 percent at 78.74 yen, above Friday's 3-1/2-month low of 77.65 yen, according to Reuters data. (Additional reporting by Nick Olivari; Editing by Leslie Adler)