* Signs of Rome political deadlock easing support euro

* Outlook for the common currency still bleak

* Euro/yen may drop below 100 yen by year-end -analyst

By Masayuki Kitano

SINGAPORE, Nov 11 (Reuters) - The euro inched higher and held above its recent one-month low on Friday, but market players were sceptical that it would see a sustained bounce due to uncertainty over whether Italy will make progress on fiscal reforms under new leadership.

The euro has gained some reprieve after a sell-off earlier in the week when Italian 10-year bond yields shot above the 7 percent level that is widely regarded as unsustainable.

Relief that an Italian bond sale on Thursday did not result in yields above 7 percent lent support to the single currency, as did signs of easing political deadlock in Rome and Greece.

Former European Commissioner Mario Monti has emerged as favourite to replace Italian Prime Minister Silvio Berlusconi within days and lead an emergency government. In Greece, former European Central Bank Vice President Lucas Papademos was appointed to head an interim crisis cabinet in Greece.

The euro edged up 0.1 percent from late U.S. trade on Thursday, changing hands at $1.3628 and staying above a one-month low of $1.3484 touched on Thursday. For the week, the euro is still down about 1.4 percent.

While political developments were positive, analysts are sceptical that they would be enough to spur a sustained drop in Italian bond yields or a rise in the euro.

"Euro, to me, is still very much a sell on rallies," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole CIB in Hong Kong, adding that his bank's forecast was for the euro to drop to $1.33 by year-end.

"I still think it's going to be some time before we see a sustained drop in Italian bond yields," he added.

Market positioning in options suggests that investors are bracing for a further slide in the euro, with euro/dollar one-month risk reversals quoted at 4.35/3.85 in favour of euro puts.

That is close to the extreme levels seen back in September, before the euro hit a nine-month low of $1.3145 in early October.

DOLLAR/YEN DIPS

Closer to current levels, one possible downside target for the euro lies near $1.3405, the 76.4 percent retracement of the euro's $1.3145 to $1.4248 rally.

Resistance on the daily Ichimoku chart, a popular technical analysis tool, lies near $1.3678, where the tenkan sen, or conversion line, now comes in.

The euro held steady against the yen at 105.68 yen , staying above a one-month low near 104.74 yen hit on Thursday.

Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo, said he thought there was a better than even chance of euro/yen dropping below 100 yen by year-end.

"To think that the debt problems will settle down just because a potential successor to (Italian Prime Minister Silvio) Berlusconi has emerged, would be being too optimistic," Karakama said.

"We don't know whether a new government would be able to persuade the public and impose painful measures," he said, adding that it was unclear whether progress would be made toward fiscal consolidation.

The dollar dipped 0.1 percent versus against the yen to 77.56 yen. It dipped to as low as 77.49 yen at one point, the lowest since Japan's massive yen-selling intervention on Oct. 31.

On Oct. 31, Japan spent an estimated 7.7 trillion yen ($98.5 billion), a daily record for intervention, to curb the yen's strength. Market sources have told Reuters that Japan has probably conducted more intervention since Oct. 31.

Asked if Japanese authorities had continued to intervene in the currency market since Oct. 31, Japanese Finance Minister Jun Azumi declined to comment on Friday, only repeating that he would take firm steps when necessary.

Both the dollar and the yen are considered safe haven currencies in times of market stress, but speculation that the U.S. Federal Reserve may eventually launch another asset-buying programme, or QE3, has helped weigh on the dollar versus the yen.

One possible support for dollar/yen lies near 77.43 yen, the 50 percent retracement of the dollar's rise on Oct. 31 from a post-World War Two record low near 75.31 yen to a three-month high near 79.55 yen.