* LCH action on Italian debt pressures euro * Markets fear ECB will be forced to do more * One-month implied vols on euro/dollar vols rises By Gertrude Chavez-Dreyfuss NEW YORK, Nov 9 (Reuters) - The euro plummeted to a one-month low against the dollar on Wednesday and could well fall further on fears Italy, the euro zone's third-largest economy, may seek a bailout to avoid a debt default. Italian borrowing costs topped seven percent as investors dumped the country's bonds after clearing house LCH.Clearnet SA raised the margin call on the country's debt. LCH had earlier taken similar action on Portugal and Ireland and both countries were forced to seek bailouts as a result. Investors are concerned the euro zone and international lenders may struggle to assemble a bailout large enough for an economy the size of Italy. The euro consequently fell to $1.35522, its lowest since Oct. 10 on trading platform EBS, and was last down 1.7 percent at $1.36011 . Political turmoil in Italy has thrust it to the epicenter of the worsening euro zone debt crisis this week as markets fret about its ability to adopt reforms to cut its debt burden and make its economy more competitive. "The euro has sort of defied gravity for the last couple of days and it's clearly looking like it has been having a wily coyote moment, sort of running off the end of the cliff without realizing that there's nothing underneath," said Ray Attrill, head of FX strategy for North America at BNP Paribas in New York. "This is exactly what happened today and was exacerbated by the LCH news, which obviously caused another downleg to the Italian bond sell-off." Even with Prime Minister Silvio Berlusconi promising to step down, bond yields continued to rise. Higher yields will increase pressure on the European Central Bank to do more. Traders said the bank bought Italian debt aggressively on Wednesday, and Brown Brothers Harriman currency strategist Mark McCormick said it may be forced to increase those purchases or cut interest rates again next month, all of which should weigh on the euro. The ECB cut rates to 1.25 percent last week. "All of this is adding to the case for more economic weakness in the euro zone as a whole, and recent manufacturing data suggests things are getting worse," McCormick said. The euro also fell 1.7 percent at 105.710 yen . The euro "looks incredibly vulnerable at the moment," said Chris Turner, head of foreign exchange strategy at ING. "Everyone has concluded that the only buyer of Italian debt is the ECB ... You need a much larger risk premium in the euro and it's not clear where this is going to end." "We think the euro will drift lower to $1.35 in the near term," said Stuart Frost, head of absolute returns and currency at RWC Partners. Brown Brothers Harriman's McCormick said he expects the euro to end the year at $1.29. One-month implied volatility in euro/dollar, which gauges market expectations of the pair's currency moves in either direction jumped to 15.65 percent on Wednesday, from 14.45 percent the previous session. Traders said Japanese investors have in the past been big buyers of Italian debt and the decision to raise margins could see many unwind those positions, adding to the euro's woes. The dollar was slightly higher against the yen 77.740 yen but was up 1.4 percent at 0.90674 Swiss francs .(Additional reporting by Steven C. Johnson; Editing by Andrew Hay) ((
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