* Greek draft budget sees larger deficit; Dexia weighs
* Euro posts biggest one-day loss in more than three weeks
* Short euros dominate hedge fund portfolios (Updates prices, adds comment)
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 3 (Reuters) - The euro fell to its lowest level in more than eight months against the dollar on Monday, as fears of a Greek default deepened after the debt-ridden country said it will not meet the deficit target set out under its bailout plan.
The single euro zone currency posted its largest one-day loss since Sept. 9, according to trading platform EBS.
Adding to negative sentiment and the market's risk-averse
mood was a decision by Moody's to place French-Belgian
financial services group Dexia
Dexia has been undermined by its exposure to Greece, raising pressure on its state shareholders to consider a second bailout. For details, see [ID:nL5E7L30GX]
The euro's losses partly reflect that "there has not really been any resolution on the EU side with Greece and their approved budget misses the targets it needs to achieve," said Alex Sinton, senior dealer at ANZ Institutional in Auckland, New Zealand.
Greek officials said the country will not meet its deficit target for 2011 even as it imposes austerity measures to boost revenue and cut future borrowing needs, which are requirements imposed by the European Union and the International Monetary Fund for disbursement of more cash to pay maturing debt. [ID:nL5E7L31G6]
Without the funds, Greece will likely default, a scenario that is being increasingly priced in by the market.
In late afternoon trading, the euro was down 1.5 percent at $1.31919
Even so, technically, the euro looked "a little over-extended," said ANZ's Sinton, who said it could retrace losses and potentially rise in the Asian session to the $1.3310 area.
Against the yen, the euro was down 1.6 percent at 101.500 yen
Euro zone finance ministers met on Monday and were expected to put pressure on Greece to implement agreed structural reforms and to discuss options for leveraging the European Financial Stability Facility, the bailout fund. [ID:nL5E7L30G0]
Kathy Lien, director of FX research at GFT in Jersey City, New Jersey, said she was not confident anything of substance would come out of the meeting.
"We do not expect EU finance ministers to make a decision to release funds to Greece at their meeting this week nor do we expect them to be able to reach an agreement on expanding the European Financial Stability Facility," Lien said.
EURO ZONE MANUFACTURING CONTRACTS
As the debt crisis showed little sign of abating, the euro zone's manufacturing contraction worsened in September as new orders shrank at the fastest pace since June 2009.
Investors are also awaiting a European Central Bank interest rate decision on Thursday. Some market players expect the ECB will cut rates by 25 basis points and announce fresh liquidity measures to support the banking sector.
Speculators have also been adding to bearish bets against the euro, a trend that is likely to continue [IMM/FX].
The options market further points to a strong appetite for long-term euro/dollar puts -- bets that the euro will weaken. One-year risk reversal spreads
Risk reversal skews favoring the downside in the euro against the dollar are further supported by positioning among hedge funds and short-term investors.
For Christian Von Strachwitz, chief investment officer at Quaesta Capital in Zurich, Switzerland, long U.S. dollar positions versus the euro dominated his portfolio last week, a trend that has been in place for the several weeks. Quaesta is a currency fund of funds with assets of $3 billion.
The euro has also seen the biggest outflow in the latest week, he added.
In other currency pairs, the dollar eased 0.6 percent against the yen to 76.620 yen, after hitting a two-week high at 77.27 yen on EBS
Tokyo dealers also reported that macro funds have been building long dollar positions, and analysts said if the current euro zone crisis deepened, the yen could weaken against the dollar, unlike the global financial crisis in 2008. (Additional reporting by Nick Olivari; Editing by Leslie Adler)