(Reuters) - The euro slipped against the dollar Tuesday, edging closer to two-year lows as investors and speculators sold the common currency on persistent worries over Spain's escalating borrowing costs and its weakening banking sector.

Worries about the cost of shoring up Spain's banking system kept Spanish debt yields elevated while the gap between them and German 10-year yields remained near euro era highs, as the risk grew that Spain may be forced to seek an international bailout.

The euro traded at $1.2530, off a day high of $1.2575 as demand from corporates and Middle East names faded.

Having failed to clear resistance at previous support around $1.2625 for three days in a row, the euro was vulnerable to another test of Friday's low of $1.2495, which marked its weakest level since July 2010. Bids just below $1.25 could offer some support, though further losses could see it drop towards $1.2450, where traders reported stop-loss sell orders.