* Swiss franc continues to weaken on intervention fears * Euro/Swiss profit taking offers on horizon at 1.2460-80 * Euro weakens as Italy, Greece threaten to destabilise By William James LONDON, Nov 8 (Reuters) - The Swiss franc fell on Tuesday as the threat of intervention drove selling in the safe-haven currency, even with bond markets heaping pressure on the euro ahead of a crucial vote in Italy, the latest flashpoint in the euro zone debt crisis. The franc extended hefty losses sustained on Monday after Swiss central bank officials stepped up warnings of more action to curb the currency's strength, if needed. The Swiss National Bank (SNB) capped the franc at 1.20 francs per euro in September and vowed to defend that level. The euro, despite being beset by the region's two-year debt crisis, rose 0.2 percent against the franc to 1.2430 francs, but it dipped against the dollar. The dollar peaked at 0.9068 francs , its highest in almost three weeks according to EBS data. It was last at 0.9031 francs, up 0.2 percent on the day. "This is clearly a reflection of the 'fear', if you like, that the SNB are going to raise the floor -- and I do think those fears are well founded," said Bank of New York Mellon currency strategist Neil Mellor. Providing resistance to the rise, traders said offers were seen at 1.2460-80 francs. The Oct. 19 peak of 1.2475 francs and the 55-day moving average at 1.2482 were also watched, with large option protection seen ahead of 1.2500. Safe-haven flows could return to support the franc with Greece's outlook highly uncertain and Italian bond yield rising quickly towards unsustainable levels. "The possibility of things going badly wrong, certainly with developments in Italy taking a turn for the worst, we could easily be looking back at the 1.22 level ... but if that happens the SNB will not wait too long," Mellor said. With the anxiety surrounding Italy, one of the world's biggest sovereign bond markets, the euro shed 0.1 percent to $1.3762 , down from $1.3773 late in New York and well off a two-month high of $1.4248 hit on Oct. 27. That said, it was still seen as resilient after holding roughly in the middle of the $1.3608-$1.3868 range of the past week, puzzling traders who had expected a bigger fall on the jump in Italy's borrowing costs. One explanation is that euro bears are still cautious about taking aggressive short positions after being badly burnt in late October when the euro briefly surged above $1.4200. Some traders fear the common currency could test the upside of the $1.3880-1.3670 upwardly sloping channel formed this month, especially as the market remains somewhat short. If such a corrective rally were to gain steam, the euro could pierce a layer of offers lurking between $1.3810 and $1.3870 to target resistance at $1.3930 -- the 50 percent retracement of the $1.4248-$1.3608 slide, they said. For the time being, bids were seen supporting the euro right below its session low around $1.3725, while traders also cited stops below there at $1.3710/15. DARK CLOUDS Still, the long-term outlook for the euro remains fragile. "The threat to the FX market, obviously, is that a country with nominal GDP growth of just 1.8 percent at the last count and debt totalling 120 percent of GDP, cannot sustain 6.5 percent yields for long," said Kit Juckes, strategist at Societe Generale. Italy's parliament gears up for a crucial vote on public finances on Tuesday, which could topple Silvio Berlusconi's government, an event that may be welcomed by markets and spark a brief relief rally, though further political turmoil could follow. Caution was underscored by persistent hedging against downside risks in option markets, with 25-delta one-month risk reversals at 4.3/3.3 favouring euro puts, not far from extreme levels of 4.45 hit in September when the euro began its slide and well above peaks seen in 2008 and 2010. Market players added that Rome's auction of fixed-rate bonds on Nov. 14 was also in focus as a possible trigger for a euro sell-off if it leads to even higher borrowing costs. Against the yen, the dollar was barely changed, hovering at 78.04 yen . The dollar index was flat on the day at 76.977.
