The euro edged lower on Monday, hurt by concerns over the euro zone economy and prospects of loose monetary policy until year-end, leading investors to bet against the single currency.

Currency speculators extended euro short positions in the week ended Aug. 17, the Commodity Futures Trading Commission said on Friday, as focus shifted back to the euro zone and away from the U.S. economy.

Data from UBS AG also showed a drop in net investment flows into the euro zone for a third consecutive week.

There's a rotation going on, and focus has shifted to conditions in the euro zone again, said Paul Mackel, director of currency strategy at HSBC in London.

On Monday, a survey of euro zone purchasing managers showed slower manufacturing growth in August.

August's deceleration in activity (in Europe) has dented some of the euro bulls' arguments about economic outperformance vis-a-vis the United States and as such put a cap on any euro rally for now, said Boris Schlossberg, director for currency research at GFT in New York.

The euro continues to be hobbled by concerns over the economic health of the periphery members, and today's mildly weaker-than-expected results from core Europe have not helped to assuage those worries, he said.

In morning trading in New York, the euro was down 0.5 percent at 108.19 yen EURJPY= after falling to its lowest in nearly eight weeks.

The single currency was 0.1 percent lower at $1.2693 EUR= after hitting a five-week low of $1.2661 on Friday, when European Central Bank Governing Council member Axel Weber said the ECB should extend its loose monetary stance, stoking worries about the euro zone economy.

Technical analysts said the next support level was the 55-day moving average at $1.2678, followed by $1.2605, a 50-percent retracement of its rise from a four-year low of $1.1876 in June to its August peak of $1.3334.

The dollar was down 0.5 percent at 85.18 yen JPY=, close to 84.72 yen hit earlier this month, its lowest since July 1995.

Markets were disappointed that the much-hyped meeting between Japanese Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa failed to live up to expectations.

Both agreed to work closely but offered few clues on whether further monetary easing was possible.

The meeting did not have much to offer, including no mention about being more active in the currency market, said Tom Levinson, FX strategist at ING. Dollar/yen is headed toward the 85 yen level and for the euro toward support that comes in just above 107 yen.

AUSTRALIAN DOLLAR

The Australian dollar reversed losses after being dented by political uncertainty from an inconclusive general election.

The currency fell earlier after neither major party in Australia won an overall majority in Saturday's election.

The Aussie traded as low as $0.8864 AUD= but it recouped losses to trade at $0.8961, helped by buying from real-money accounts.

There are still risks for the Aussie from long positioning and its sensitivity to global economic data, Mackel at HSBC said.

The currency received some help after Britain's Sunday Times reported that beverage giant SABMiller (SAB.L) (SABJ.J) was considering buying the beer operation of Australian brewer Foster's Group (FGL.AX) for about $10.9 billion.

(Additional reporting by Neal Armstrong in London; Editing by Padraic Cassidy)

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