The euro stayed below two-month highs versus the dollar on Monday, dented by a downgrade of Ireland and the suspension of talks between Hungary and the IMF, but recovered as traders awaited results of bank stress tests.

Moody's Investors Service downgraded Ireland's sovereign bond rating to Aa2 with a stable outlook from Aa1.

The International Monetary Fund and the European Union suspended on Saturday a review of Hungary's funding programme, putting some pressure on the single currency.

This means Hungary will not have access to remaining funds in a $25.1 billion loan package.  Dealers said this reminded investors of Europe's sovereign debt problems just days ahead of the results of stress tests on the region's banks.

The impact of the Ireland downgrade was muted as Moody's kept a stable outlook. But we expect euro/dollar to remain capped and think the stress tests will provide the last chance to sell the euro again, said Manuel Oliveri, currency strategist at UBS.

He added the rally which culminated in two-month highs at $1.3008 on Friday had been driven by a pull-back on short positions, with no significant fresh demand for the euro emerging.

At 0917 GMT, the euro was trading up 0.2 percent versus the dollar EUR= at $1.2955, steadying off a session low of $1.2872.

Traders said semi-official demand was helping to push the rate back above $1.2900, while a large buy order from the Middle East, executed through a major U.S. bank in London, had helped euro/dollar to a session high of $1.2991.

Traders also highlighted option expiries in the euro at $1.2970 and $1.3000, potentially hampering the currency until they rolled off at 1400 GMT.

Market players awaited the results of stress tests on 91 European banks due on Friday.

There have been optimistic noises out of Europe about the stress test results and I think that's helping the euro in the short term, said Michael Hewson, analyst at CMC Markets.

Greece's central bank chief said he expected the country's lenders to smoothly pass European Union stress tests.

Technical analysts saw near-term support for the euro around $1.2850, the 50 percent retracement of the euro's fall from a high near $1.3820 on March 17 to a four-year low of $1.1876 hit in early June.

The euro was up 0.8 percent versus the yen EURJPY=R at 112.95 yen. Traders reported offers placed around the Ichimoku cloud base at 113.15.

The dollar was up 0.6 percent against the yen at 86.88 yen JPY=, recovering from a seven-month low of 86.27 yen hit on Friday on EBS.

Latest data from the Commodity Futures Trading Commission showed speculators have been increasing long positions in the yen and cutting longs in the dollar. .

(Editing by Nigel Stephenson)