* Uncertainty over Spanish bailout request unnerves market
* Spanish 10-year borrowing costs rise above 6 percent
* Support for euro expected around $1.2826
* Bank of Spain warns of significant fall in GDP in Q3
By Jessica Mortimer
LONDON, Sept 26 (Reuters) - The euro fell to a two-week low against the dollar and the yen on Wednesday, dragged lower by rising Spanish borrowing costs as uncertainty grew over when Spain might request a bailout.
Worries about Spain increased as the Bank of Spain said the economy fell “at a significant rate” in the third quarter and after protesters clashed with police in Madrid on Tuesday before the government’s 2013 budget, due on Thursday.
The unrest highlighted the challenges facing the euro zone’s fourth largest economy as it struggles to control its debts. The country’s 10-year bond yields topped 6 percent on Wednesday for the first time in a week.
The euro was last down 0.3 percent at $1.2863, having earlier hit $1.2848, its lowest since Sept. 12.
An aid request by Spain is a condition for the European Central Bank to start buying its debt. Madrid’s apparent reluctance to seek help has dented demand for the euro in recent sessions.
“The more jittery the market gets about when Spain will seek aid the higher yields will go ... The key will be whether Spain asks for a bailout before their yields surge,” said Paul Robson, currency analyst at RBS.
Prime Minister Mariano Rajoy told the Wall Street Journal in an interview published on Wednesday he was ready to seek a bailout if Spain’s debt financing costs stayed too high for too long.
RBS’s Robson said the euro may weaken further over the next couple of days, after which investors may look to buy it.
The euro has fallen around 2.5 percent since hitting a four-month high of $1.31729 last week. Further losses could see it break below chart support at its 200-day moving average around $1.2826.
“The Spanish story does seem to be deteriorating,” HSBC currency strategist Daragh Maher said. He said a break below $1.28, which acted as resistance as the euro rallied earlier this month, could open the door for further losses.
The euro also fell to a near two-week low against the yen of 99.71 yen on the EBS trading platform.
The risk of unrest in Greece, where the coalition faced its first big anti-austerity strike since taking power in June, also contributed to negative sentiment towards the euro.
The euro has succumbed to profit-taking after rallying around 9 percent from a two-year low of $1.2042 hit in July, helped by the ECB bond-buying plan and a third round of monetary easing from the U.S. Federal Reserve that lifted perceived riskier currencies against the dollar.
The dollar rose to a two-week high against a basket of currencies, with the dollar index hitting 79.900.
However, the U.S. currency fell to a near two-week low against the yen of 77.60 yen on EBS trading platform.
Traders said the yen could get a lift this week from Japanese fund repatriation before half-year book-closings, although some market participants said many companies had already covered their needs so such flows were unlikely to be significant.
More falls in the dollar could see it drop towards 77.13 yen, a seven-month low of hit on Sept. 13, the day the Fed announced aggressive stimulus to promote economic recovery.