* Dollar holds near 7-week high, euro on defensive
* Euro-area debt woes push gold to two-week high
* Stocks steady, investors nervous over European debt woes
* Oil rebounds on expectations of lower inventories (Updates prices throughout)
By Sugita Katyal
SINGAPORE, May 24 (Reuters) - The dollar held firm on Tuesday and stocks in Asia steadied but the euro remained on the defensive on worries that the euro zone's debt crisis was deepening and could spread to heavyweights such as Spain.
Volatile commodity prices also kept investors on edge, with gold firming to a near two-week high as buyers looked to safe-haven assets.
Moody's Investors Service said other stressed European sovereign debt would be affected in case of a Greek default, and separately reported it was reviewing the rating of some UK banks for a possible credit rating downgrade. [ID:nATH006094] [ID:nWNA9309]
Standard & Poor's cut its outlook for Italy to "negative" from "stable" on Saturday, while a crushing defeat for Spain's ruling socialists in local elections raised worries about the government's ability to curtail debt.
Madrid, which will auction more short-term debt later on Tuesday, has been seen as an example of fiscal reform.
"The huge storm of risk reduction will rip through markets if the focus turns to Spain and Italy. It's clear they don't have money to bail out these countries," said Ayako Sera, a market economist at Sumitomo Trust and Banking.
"What we are seeing now could just be the beginning of it," she added.
The dollar hit an eight-week high against the pound and edged closer to a 10-week high versus the euro on euro zone's debt crisis worries.
The euro was last at $1.4042 and the index of the dollar against six major currencies was up 0.1 percent at 76.178 points. On Monday, when the local market closed the euro had been at $1.4017.
But euro buying from Asian central banks as well as stable commodity and regional share prices helped stem the euro's decline in Asian trade, with some traders saying that in the near-term there might be a small rebound for the single currency.
The euro fell to a two-month low of $1.3968 on Monday, where it had support from its 100-day moving average.
The euro has been suffering from a lack of consensus among European policy-makers on how to deal with Greece, with many opposing the idea of debt restructuring while some market players think it is inevitable.
"The euro may not stop falling until European policy-makers come up with a more reassuring stance on debt problems. Before that happens, the euro could fall to around $1.35," Sumitomo Trust's Sera said.
Despite the euro zone debt woes, Asian stocks were mostly steady with MSCI's index of Asia-Pacific stocks outside Japan up 0.1 percent and Japan's benchmark Nikkei closing up 0.2 percent after earlier hitting a fresh five-week low.
Seoul shares rebounded 0.3 percent after sharp falls in the previous session,d helped by techs and refiners, but trade was cautious amid worries about Europe and a weakening global economic backdrop.
"It appears that a lot of selling is coming from European funds, as worries about the region's debt issues deepens," said Kim Seong-hong, a market analyst at Samsung Securities.
"Although the market is bouncing, momentum is pretty fragile. Direction can change anytime," Kim added.
Gold rose to its highest level in almost two weeks on worries that Europe's debt crisis was spreading, sending euro-denominated bullion to a record above 1,081 euros an ounce.
Spot gold was last at $1,517.81 an ounce, having hit an intraday high at $1,517.74 an ounce, its strongest since May 11.
Brent crude futures rebounded from the previous day's sharp fall as expectations that strong oil demand was trimming inventories overrode concerns about Europe's debt crisis.
Brent crude for July
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http://blogs.reuters.com/hedgehub (Additional reporting by Jungyoun Park in SEOUL, and Hideyuki Sano in TOKYO; Writing by Sugita Katyal; Editing by Kim Coghill)