FOREX-Euro edges up, sterling slips on debt warning

* Euro edges up but outlook still grim

* Euro hits lifetime low vs Swiss franc

* Investors stay jittery over euro zone debt crisis impact

* Sterling slips on Fitch's UK debt warning

(Updates prices, adds comment, detail, changes byline, dateline)

By Steven C. Johnson

NEW YORK, June 8 (Reuters) - The euro edged up on Tuesday, as investors booked profits a day after the currency hit its lowest level against the dollar since early 2006, and the pound fell after a ratings agency urged Britain to cut its deficit.

Euro gains were slight, though, and analysts said the market remained anxious about debt levels in several euro zone countries. With Portugal, Italy and Spain set to sell new bonds this week -- the first sale for Spain since its credit ratings downgrade -- investors were still wary of overexposure to the euro, keeping the currency capped below $1.20.

"The euro decline isn't over," said Marc Chandler, senior strategist at Brown Brothers Harriman in New York. "There are supply concerns this week, and what we're seeing now is a brief respite. A rise above $1.20 would be a good chance to sell."

The euro was last up 0.2 percent at $1.1930 EUR=, above a session low around $1.19 and Monday's trough of $1.1876, its lowest level against the dollar since March 2006.

Analysts said the euro gained some support after euro zone ministers made final arrangements on Monday to set up funds for countries facing debt servicing problems.

Some market participants said euro/dollar may be hemmed in by options expiring at 10 a.m. (1400 GMT).

"There are a big euro expiries at $1.1900, $1.1950 and $1.2000, which could keep it in a range today," said a London based sales-trader.

SWISSIE RISES, STERLING FALLS

The euro also skidded to a lifetime low beneath 1.38 Swiss francs EURCHF= and dipped briefly below 109 yen before rebounding to 109.21 yen EURJPY=, up 0.3 percent. European shares .FTEU3 also slipped.

Switzerland's central bank has been intervening in currency markets since early 2009 to prevent excess franc strength but appears to have pulled back in recent days. Data Tuesday showed it's foreign exchange reserves soared in May.

Sterling fell 0.5 percent to $1.4402 GBP=D4 after Fitch Ratings said the UK was facing a "formidable" fiscal challenge and said Britain's public debt ratio had climbed more quickly than those of other top-rated sovereign credits. [ID:nWLA5820]

"It's more of the contagion fear that's been gripping markets for months now," said John Doyle, strategist at Tempus Consulting in Washington. "Fitch's comments on the UK deficit are important."

The dollar rose 0.1 percent to 91.461 yen JPY= as new Japanese Prime Minister Naoto Kan chose a fiscal conservative as his finance minister. Kan has in the past advocated for a weaker yen to help Japanese exports and fight deflation, but Chandler said that might be wishful thinking as long as the world is in crisis mode.

During times of risk aversion, the yen tends to rise as investors exit positions in riskier currencies and assets.

Appetite for risk remained decidedly weak across markets, particularly in Europe, where analysts noted that bond yield spreads widened between benchmark German bunds and other sovereign debt, including that of Spain and France.

Strategists at Citigroup said a 200-basis-point gap between Spanish and German 10-year bonds and a close Monday in the CBOE Volatility Index .VIX above a key technical level suggest an "anti-risk environment in the days ahead," which pressure the euro and boost U.S. Treasury yields.



(Additional reporting by Naomi Tajitsu in London; Editing by Padraic Cassidy)