* Euro falls, erasing earlier gains as Spain worries grow
* Spain’s Montoro says financial markets closing to Spain
* Market awaits G7 conference call on euro zone crisis
By Jessica Mortimer
LONDON, June 5 (Reuters) - The euro fell on Tuesday as a Spanish minister said high borrowing costs meant credit markets were closing to Spain, though losses were limited before an emergency conference call of Group of Seven finance chiefs.
The G7 ministers and central bankers will discuss the euro zone’s worsening debt crisis, although the chances of a significant breakthrough looked slim.
“Until there is a prospect that there will be big steps made by European leaders then the euro will continue to trend lower ... I doubt there will be a sustained rebound any time soon,” said Peter Wuyts, analyst at KBC in Brussels.
He said that in order to break the euro’s downtrend European politicians would have to agree to move towards greater unity on banking sector or fiscal policy, but with opposition from EU paymaster Germany this was unlikely to happen.
The G7 talks had boosted the euro earlier but it fell after Spain’s Treasury minister Cristobal Montoro highlighted the funding problems facing Spain as investors fretted the country may have to seek external aid.
The euro fell 0.6 percent on the day to a session low of $1.2410, more than a cent below an earlier one-week high hit when investors cut back hefty bets against the currency.
On Friday, it hit a two-year low of $1.2288.
“People will be happy to sell into moves above $1.25,” said Anders Soderberg, currency strategist at SEB in Stockholm.
The euro has recovered since weak U.S. jobs data on Friday weighed on the dollar as speculation grew about the prospect of another bout of monetary easing in the United States. But Soderberg said this was merely “a short-term break in what now seems to be a well-established downtrend”.
Investors are also worried about the risk that a Greek election in two weeks could push Athens out of the euro.
The depths of the problems facing the euro zone were underlined by a purchasing managers’ survey showing the euro zone’s private sector economy shrank at the fastest pace in nearly three years in May. Euro zone retail sales and German industrial orders were also worse than forecast.
The common currency faced chart resistance at $1.2545, the 76.4 percent Fibonacci retracement of its decline last week, and at $1.2570, the 23.6 percent retracement of its longer-term decline from a February high near $1.35.
It also erased earlier gains against the yen and was last down 0.8 percent on the day at 97.12 yen. This still left it comfortably above Friday’s 11-year low of 95.59 yen.
Against sterling, the euro fell 0.4 percent to 80.94 pence , off an earlier one-month high of 81.405 pence.
The 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.
International Monetary Fund Managing Director Christine Lagarde said in an interview with a Swedish newspaper that the ECB had room for another interest rate cut.
There has been some talk of a cut, although a recent Reuters poll showed only 11 out of 73 analysts polled expected a move this month.
In a sign of increasing concern about the impact of the euro zone debt crisis, the Reserve Bank of Australia cut interest rates by 25 basis points on Tuesday.
The Australian dollar was down 0.1 percent at $0.9720 , having risen earlier as the rate cut was less than some had expected.
Traders will also be looking ahead to testimony by U.S. Federal Reserve Chairman Ben Bernanke on Thursday for any hints on the possibility of more quantitative easing.
The dollar was down 0.15 percent at 78.20 yen, taking it closer to Friday’s 3 1/2-month low of 77.652 yen though market players were wary about the possibility of Japanese authorities stepping in to stem the yen’s rise. (Editing by Nigel Stephenson)