(Reuters) - The euro capped off the most tumultuous year in its short history on Friday, slipping to a 10-year trough below 100 yen and struggling to hold gains against the dollar, a trend traders expect to continue in 2012.

The euro fell 0.9 percent to 99.77 yen and looked set to end the year down more than 8 percent against Japan's currency.

It held up a bit better against the dollar, shedding 3.1 percent since the start of 2011, but day-to-day trading for most of the year was extremely volatile.

From around $1.33 in January, the euro soared to $1.4939 by May, then began a steady descent as a euro zone debt crisis that began in smaller countries such as Greece and Ireland spread to the larger core economies of Italy and Spain.

On Friday, the euro traded at $1.2958, about a cent above a 2011 low hit earlier this week.

Given that we are closing the year below $1.30, the path seems to be set, wrote Dennis Gartman, an independent investor and author of the daily Gartman Letter.

He predicted the euro would drift toward $1.20 in early 2012 as the resolve on the part of the political, fiscal and monetary authorities in Europe are put to test.

The focus shifted to Spain on Friday after the country's new government said the 2011 budget shortfall would be much larger than expected, and it announced tax hikes and wage freezes that could push Spain back to the center of the crisis.

The news drove the euro below 100 yen, though it later recovered some ground against the dollar, partly as traders took some last minute profits and closed their books on 2011.

Since the market is overly bearish against the single currency, that does leave it susceptible to short covering bounces, said Joe Manimbo, market analyst at Travelex Global Payments in Washington. But overall I think these anti-euro bets are justified given the still-unresolved debt crisis and the poor growth prospects.

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The same baggage that dragged on the euro this year - worries about sovereign debt levels and a lack of policy solutions - could hammer it in 2012, Manimbo said, adding that it could slide to $1.25 or even lower in the first quarter.

In the absence of a comprehensive European policy response to the debt crisis, the euro could test its 2010 low of $1.1876 next year, some traders said.

The euro's troubles have benefited the dollar and yen, both of which tend to attract safe-haven flows during times of trouble. Against a basket of major currencies, the dollar was on track to finish the year up 1.3 percent, its second consecutive annual rise.

Still, questions remain about the strength of the U.S. economy and whether the Federal Reserve will opt for a third round of monetary easing to boost lending and growth.

If the Fed were to flood the financial system with more money through asset purchases or to state plans to extend its zero interest-rate policy beyond mid-2013, the dollar could struggle.

Some also said any decline in Chinese demand for U.S. assets could push the dollar lower. China has been a steady dollar buyer in order to limit gains its own currency, the yuan.

Chinese authorities loosened their grip a bit on the yuan this year, letting it appreciate by 4.7 percent against the dollar. It closed at a record high against the greenback on Friday.

What China does next year may be more important than anything that is happening in Europe, because for 17 years the Chinese have supported the dollar and the Treasury market, said Russell Napier, strategist at CSLA Asia Pacific Markets, a Hong Kong-based brokerage.

The euro, however, should remain the center of attention, at least in the first quarter of the year.

Italy, the euro zone's third-largest economy, remains at the center of the debt crisis, and its borrowing needs could overwhelm the bloc's financial defenses if it were forced to seek an international bailout.

Ten-year Italian yields are above the 7 percent level considered by markets as unsustainable, and the country needs to raise 450 billion euros in debt markets in 2012. Government issuance of new euro zone debt will be scrutinized for any sign investors are shunning the currency bloc.