* Greek draft budget forecasts bigger deficit,Dexia weighs
* Euro hits 8-1/2-month trough versus dollar
(Updates prices, adds details, comments, changes dateline, previous LONDON)
NEW YORK, Oct 3 (Reuters) - The euro fell to an 8-1/2 month low against the dollar on Monday, and a decade low versus the yen, as mounting concerns of a Greek default deepened investor concern about the euro zone's banking sector.
With Europe still deeply divided over how to tackle the spiralling debt crisis and the risks that poses for the bigger euro zone economies and the financial sector, the euro is likely to stay under pressure, market players said.
The euro was down 0.5 percent at $1.3325
Against the safe-haven yen, the euro was down 0.9 percent at 102.205 yen
Concerns about cooling global growth prompted both leveraged and macro funds to unwind positions funded in the dollar and the yen. As a result, the risk-sensitive Australian dollar hit a 10-month low at $0.9592
"The economic and financial climate continues to cool and incertitude will force wary investors to maintain a defensive posture" said Jessica Hoversen, fx analyst at MF Global in New York. "The U.S. dollar will stay the chief beneficiary of the dampened outlook for growth and the escalating crisis in Europe."
Moody's put the rating of financial services group Dexia
Euro zone finance ministers are meeting on Monday and are expected to put pressure on Greece to implement agreed structural reforms and to discuss options for leveraging the European Financial Stability Facility (EFSF). [ID:nL5E7L30G0].
That meeting comes after Greece said it would miss a deficit target set just months ago. [ID:nL5E7L30G3]
With the debt crisis showing little sign of abating, the euro zone's manufacturing contraction deepened in September as new orders shrank at their fastest pace since June 2009.
U.S. ISM manufacturing data expected later in the session is likely to add to economic growth concerns by highlighting a gloomy outlook for the world's largest economy.
Tom Levinson, FX strategist at ING in London, said a poor ISM number would be positive for the dollar in the current risk-averse environment and could potentially push the euro below $1.33.
Investors are also awaiting an European Central Bank rate decision on Thursday. Some market players are expecting it to cut rates by 25 basis points and announce fresh liquidity measures to support the banking sector.
EURO SHORT POSITIONS
Speculators have been adding to their bearish bets against the euro and this trend is likely to continue. [IMM/FX]
"The market is short euro and rightly so, with fundamental factors backing it up," said Chris Walker, forex analyst at UBS in London. "We could see some short term unwinding, but that will give investors a better level to sell. We expect investors to continue building short positions against the euro."
The options market points to a strong appetite for long-term euro/dollar puts -- bets that the euro will weaken. One-year risk reversal spreads
The greenback eased against the yen to 76.79 yen, having earlier hit a two-week high at 77.27 yen on EBS
Orders are seen around 77.50, traders said.
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. (Reporting by Nick Olivari, Editing by Chizu Nomiyama)