* DXY hits 8-month peak
* Dlr/yen seen edging higher; macros spotted building longs
* Euro zone manufacturing due later on Monday
By Antoni Slodkowski
TOKYO, Oct 3 (Reuters) - The euro sank to an eight-month low against the dollar on Monday and is poised to fall further after the Greek government said the debt-ridden country will miss a deficit target set just months ago in a massive bailout package.
Traders and analysts said that with Europe divided over the best cure for the debt crisis and with the possibility of a Greek default looming larger than ever, the euro was likely to grind lower in the coming days.
"A Greek default is a sort of Pandora box no one wants to open. While some markets seem to have priced in such possibility, it looks like euro has still some way to go should it happen," said Teppei Ino, a currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
The euro dived as deep as $1.3323 , from $1.3418 in New York on Friday, before nudging back up to $1.3344. The single currency?lost 7 percent in September, its largest monthly drop since November 2010.
It also fell to a one-week low against the yen at 102.98 , moving a notch closer to a decade low at 101.95 yen.
If Greece defaults on its debt, Ino said he thought the euro could initially fall to $1.32 and would then quickly move towards $1.30.
Underscoring jitters over European financial institutions, reports emerged that ministers from France and Belgium would meet to shore up the balance sheet of troubled financial services group Dexia.
Making matters worse, Germany's finance minister ruled out a higher contribution to the euro zone's rescue fund beyond an already approved 211 billion euros, while a key German coalition member of parliament said "Greece is bankrupt".
For now, technical support for the single European currency lies at January lows around $1.3250-80 and then in the $1.3250-00 zone, formed by trend channels, internal wave targets and Fibonacci projection objectives.
This support area combined with the strong resistance on the dollar index at 78.75-90, formed by a cluster of highs and lows on the daily charts, has the capacity to provoke a correction to the euro's decline from $1.4939.
Greece will miss a deficit target despite severe austerity measures, although inspectors from the IMF, EU and European Central Bank --the troika--are widely expected to release the next aid package.
While all eyes will be on the inspectors' forecasts for 2012-2014, Greek bond holders may have to take even larger haircuts, according to some reports.
Euro zone finance ministers are expected to discuss various plans about Greece and the rescue fund later on Monday.
Dexia , which received a combined 6 billion euro bailout from Belgium and France at the height of the financial crisis in 2008, has been badly hit by its huge exposure to Greece as well as the freeze in the inter-bank lending markets.
EDGING HIGHER
The dollar index hit an eight month high, edging up 0.5 percent to 78.888.
The greenback also gained a little on the yen, adding 0.1 percent to 77.10 yen after breaking above its 55-day moving average at 77.17 for the first time since its spike after intervention on Aug. 4. Stop losses loom around 77.30 yen, traders said.
Although the dollar failed to maintain early gains above 77.17, a close above the mark could improve sentiment toward the pair, especially as seasonal selling before end-Sept book-closings by Japanese exporters has run its course.
Tokyo dealers also reported macro funds building dollar-long positions and analysts said that if the current crisis deepened, this time the yen could weaken versus the dollar, unlike the global financial crisis in 2008.
"Contrary to what happened during the global financial crisis in 2008, this time the yen carry trade has not been as active," said Junya Tanase, chief strategist at JPMorgan Chase in Tokyo, adding that the dollar may strengthen to 78-79 yen over the next two weeks, although other yen crosses were likely to soften.
PMI numbers from China and the export numbers from Korea suggest global demand has not eased as quickly as some investors had feared in recent weeks, but this failed to make much of an impact on financial markets.
The Australian and New Zealand dollars were off to a rocky start on Monday with the Aussie at $0.9665 .
European manufacturing PMI will be released on Monday and another deterioration below the key 50 level could see the euro sink further. It is also a big week for U.S. data with ISM Manufacturing on Monday and non-farm payrolls on Friday. (Additional reporting by Cecile Lefort in Sydney and Hideyuki Sano in Tokyo)
