(Reuters) - London copper regained some ground after hitting its lowest level in 2012 as mounting fears about Europe's debt crisis spurred another round of risk aversion, setting the metal up for its longest monthly losing streak in a year.

Copper has fallen nearly 11 percent in May, its third straight month of decline, and is 15 percent off this year's peak of $8,765, with sluggish demand in top consumer China also hurting prices.

Three-month copper on the London Metal Exchange rose $17 to $7,492 a metric ton (1.1023 tons) by 3.54 a.m. EDT, reversing early losses after the euro bounced off two-year lows. The metal hit $7,422.75 earlier, its lowest level since December 29.

The most-active September copper contract on the Shanghai Futures Exchange closed down 1.4 percent at 54,530 yuan ($8,600) a metric ton, but off a session trough of 54,280 yuan, its weakest level since December 20.

Worries about the health of the global economy have already dragged London copper prices down 26 percent from last year's record high of $10,190.

The uncertainties in Europe are keeping everyone cautious today. There is just too much that can potentially go wrong in the region right now and no one dares to go too long, said a Shanghai-based copper investor.

SPAIN'S BANKS

Doubts about Spain's ability to prop up its banks, twinned with fears that Greece will leave the euro, have spilled over to Italy, which saw its 10-year borrowing costs top 6 percent at an auction, marking a new high since January and heightening contagion concerns.

Spain is the fourth-largest economy in the euro zone. There are fears that the Spanish government could become insolvent if it is left to bail out the nation's banks.

The latest Greek polls also showed parties for and against a bailout came in neck-to-neck - heightening fears of a Greek exit from the euro zone.

Copper fell steeply on Wednesday after top policy advisers to the Chinese government tempered expectations of a stimulus package by saying the country did not need massive fiscal stimulus to stabilize growth.

Traders, however, said prices were still supported by hopes that growth supportive policies will buoy demand.

The stimulus package this time is much less than in 2009, but it is still logical to say that the spending programs will create more demand for copper by the end of the year, the Shanghai-based copper investor said.

Copper demand will definitely lift with the earmarked government projects. But to sustain demand over a longer term, the markets will eventually hope to see a more stable euro zone, and more measures to stimulate domestic consumption in China, said CIFCO analyst Zhou Jie.

Macquarie Bank said in a note on Thursday that China had made provisions to help local governments finance their 2012 infrastructure projects largely through bond issuance, a move which would allay concerns that provincial authorities would struggle to fund their spending on big projects.

Total government bond issuance is expected to be 250 billion yuan this year, more than the 200 billion yuan in the past three years, Macquarie analyst Bonnie Liu said.

($1=6.3577 Chinese yuan)

(Editing by Ed Davies and Manolo Serapio Jr.)