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By Hideyuki Sano
TOKYO, June 5 (Reuters) - The euro edged up further from last week's two-year low on Tuesday as sellers were tempted to pare back their huge bets against the currency ahead of a conference call by the Group of Seven financial policy makers.
The move reflected caution in case policymakers took powerful steps to contain the debt crisis, although many market players are sceptical of a major breakthrough given a lack of consensus within Europe on how to save Spanish banks among other things.
"It will take a long time to resolve the debt crisis. I don't expect European policy makers to come to an agreement soon. I am ready to sell the euro around $1.2550," said a trader at a Japanese bank.
The euro rose about 0.3 percent in early Asian trade to $1.25429, its highest in a week, extending its rebound since it hit a two-year low of $1.2288 last Friday.
The single currency also rose 0.3 percent to 98.22 yen , rising further from Friday's 11-year low of 95.59 yen.
Finance chiefs from the Group of Seven leading industrialised powers will hold emergency talks on the euro zone debt crisis on Tuesday in a sign of heightened global alarm about strains in the 17-nation European currency area.
The news was enough to prompt some euro bears to take profits as the market is extremely short on the euro. The data from U.S. financial watchdog showed speculators' net euro short position stood at a record high last week.
France and the European Commission also signaled their support on Monday for an ambitious plan to directly use the euro zone's permanent bailout fund to rescue stricken banks.
But Germany, the euro zone's biggest economy and the biggest contributor to the European Stability Mechanism, has so far opposed any use of bailout funds without a country having to submit to a politically humiliating austerity programme imposed by international lenders.
As any agreements on a rescue deal on Spanish banks are likely to need more time, some market players see an outside chance of the European Central Bank taking fresh steps to support growth at its policy meeting on Wednesday, although a majority of market players still see limited chance of any action.
"It's interesting to see what the G7 will discuss ahead of the ECB (European Central Bank) meeting tomorrow. They may put pressure on the ECB to do something," said Eiji Kinouchi, chief technical analyst at Daiwa Securities.
Ahead of the ECB, the market will be watching the Reserve Bank of Australia's rate announcement 02:30 p.m. (0430 GMT) on Tuesday, where market expectations vary wildly from no action to a 50 basis point cut.
Local money markets are pricing in a rate cut of at least 25 basis points on top of last month's surprise half-percentage point easing.
A 50 basis point cut would hurt the Aussie as it erodes the currency's yield advantage over other major currencies, a magnet for foreign investment in the Aussie.
But some traders think a deeper cut should help the Australian economy weather the global storm and support the Aussie.
"While many countries do not have much room to stimulate the economy (through monetary policy), Australia still can do that," said Junya Tanase, chief currency strategist at JPMorgan Chase.
The Australian dollar changed hands at $0.9742, up 0.25 percent so far on the day in line with short-covering in the euro and risk assets and above an eight-month trough of $0.9581 hit on Friday.
The Japanese yen moved little against the U.S. dollar at 78.33 yen, off Friday's 3 1/2-month low of 77.652 yen. (Reporting by Hideyuki Sano; Editing by Richard Pullin)