Merkel's conservatives suffered a crushing defeat

SINGAPORE, May 14 (Reuters) - The euro hit its lowest level in nearly four months on Monday after Greek political leaders failed in their latest efforts to form a ruling coalition, keeping investors on edge over the risk of the country exiting the euro zone. Coalition talks in Greece hit an impasse on Sunday and Greece's radical leftist leader spurned an invitation from the president for a final round of talks on Monday, all but ensuring a new election. Adding to the negative tone, German Chancellor Angela Merkel's conservatives suffered a crushing defeat on Sunday in an election in Germany's most populous state, a result which could embolden the left opposition to step up attacks on her European austerity policies. The euro seems likely to head lower in coming weeks, especially since the European Central Bank may eventually adopt further monetary easing steps to support the region's economy, said Akira Hoshino, chief manager for Bank of Tokyo-Mitsubishi UFJ's foreign exchange trading department in Tokyo. "I think they will steer the rudder that way, even if that leads to costs on the inflation front. If that is the case, the direction would be toward weakness in the currency," he said. The euro dipped to $1.2878 at one point on trading platform EBS, its lowest level since Jan. 23. It last stood at $1.2891, down 0.2 percent from late U.S. trade on Friday. The euro has come under pressure after Greece's two main pro-bailout parties failed to win a majority in elections earlier in May, leaving questions over the country's ability to avert bankruptcy and stay in the euro. Underscoring increasingly bearish market sentiment toward the euro, data from the U.S. Commodity Futures Trading Commission showed currency speculators increased their net short positions in the euro in the week ended May 8 to the highest level since mid-February. Traders and analysts say the speed of the euro's fall versus the dollar is likely to remain relatively slow. "Corporates based in the euro zone are still strong buyers of the euro (versus the dollar)," said Gareth Berry, G10 FX strategist for UBS in Singapore. "They see the euro's current level as quite attractive. In some cases they see it as a bargain, and that's one thing that has helped minimise or at least cushion the blow to the euro," he said, adding that analysts at UBS expect the euro to dip to $1.25 in three months' time. REUTERS