The euro stayed below two-month highs versus the dollar on Monday, dented by a downgrade of Ireland and the suspension of talks between Hungary and the IMF, but steadied as traders awaited results of bank stress tests.

Moody's Investors Service downgraded Ireland's sovereign bond ratings rating to Aa2 with a stable outlook from Aa1.

The International Monetary Fund and the European Union suspended on Saturday a review of Hungary's funding programme, putting some pressure on the single currency.

This means Hungary will not have access to remaining funds in a $25.1 billion loan package. Dealers said this reminded investors of the region's sovereign debt problems just days ahead of the results of stress tests on European banks.

The impact of the Ireland downgrade was muted as Moody's kept a stable outlook. But we expect euro/dollar to remain capped and think the stress tests will provide the last chance to sell the euro again, said Manuel Oliveri, currency strategist at UBS.

He added the rally which culminated in two-month highs at $1.3008 on Friday had been driven by a pull-back on short positions, with no significant fresh demand emerging for the euro.

At 0730 GMT, the euro was trading up 0.3 percent versus the dollar EUR= at $1.2960, recovering from a session low of $1.2872. Traders noted semi-official demand helping to push the rate back above $1.2900.

Market players awaited the results from stress tests on 91 European banks due on Friday.

While European leaders believe that the tests will bring confidence, the markets may not believe the sugar-coated figures with the euro primed for another leg down in the weeks ahead, said David Scutt, forex trader at Arab Bank, Australia.

Near-term support for the euro is seen around the $1.2850 area, the 50 percent retracement of the euro's fall from a high near $1.3820 on March 17 to a four-year low of $1.1876 hit in early June.

The dollar was flat against the yen at 86.64 yen JPY= but not far from a seven-month low of 86.27 yen hit on Friday on EBS. Asian trade was subdued with Tokyo markets closed for Marine Day.

Latest data from the Commodity Futures Trading Commission showed speculators have been increasing long positions in the yen and cutting longs in the U.S. dollar. .

(Additional reporting by Masuyaki Kitano, editing by Nigel Stephenson)

Australia International Monetary Fund