(Corrects brokerage name in 16th paragraph to FPG from FPJ)

* Diminishing status as reserve currency seen hurting euro

* Euro slide accelerates after breach of $ 1.20 threshold

* Dollar index hits fresh 9-yr high, pound hits 17-month low

By Shinichi Saoshiro

TOKYO, Jan 5 (Reuters) – The euro fell to a nine-year low against the dollar on Monday as bets mounted that the currency will suffer further declines, faced with the possibility of more monetary easing by the European Central Bank and its diminishing status as a reserve currency.

The euro was in retreat after ECB President Mario Draghi late last week underscored the divergence between European and U.S. monetary policy, which is set to remain a key theme in 2015.

The common currency fell to $ 1.1860 in early Asian trade, its lowest since March 2006. It last stood at $ 1.1950, down 0.4 percent on the day.

The euro also fell against the yen, stooping to a two-month low of 146.36 yen.

The euro shed nearly 12 percent against the dollar in 2014 with the Federal Reserve poised to hike rates in 2015 thanks to a recovering economy while ECB’s monetary policy is so far headed in the opposite direction.

Draghi told the German financial newspaper Handelsblatt that the ECB was less likely to preserve price stability than it was six months ago, suggesting it was ready to take bolder steps on monetary stimulus early this year to shore up the flagging euro zone economy and ward off deflation.

“There were basically three factors that pushed the euro lower. First was Draghi’s comment, second was the prospect of a weak euro zone inflation data print on Wednesday and lastly IMF’s central bank statistics,” said Yunosuke Ikeda, senior FX strategist at Nomura Securities in Tokyo.

Hedge funds appear set to follow through this year with selling the euro and buying the dollar, Ikeda said.

The share of currency reserves denominated in the euro held by central banks fell to its lowest in over a decade in the third quarter of 2014, IMF data showed.

The euro’s descent accelerated as stop-loss sales were triggered when the $ 1.20 threshold was tested then breached.

The market focused on Monday’s German and Wednesday’s euro zone inflation data for clues that may back ECB Draghi’s cautious economic view.

Boosted by its gains against the euro, the dollar climbed to a fresh nine-year peak against a basket of key currencies. The dollar index touched 91.482, its highest since December 2005.

The dollar was steady at 120.470 yen after falling to a session low of 119.980.

The greenback initially dipped against the safe-haven yen as Tokyo stocks started the new year in the red due to risk aversion, but the greenback pared losses as the shares eventually rebounded.

Still, aversion towards risk generated by factors including Greek political uncertainty is expected to provide support to the yen unexpected until recently.

“The dollar is stabilising around 120 yen for now but volatility is likely to remain high as the euro continues to cause turbulence,” said Koji Fukaya, president of FPG Securities in Tokyo.

“The dollar will remain strong against the yen in the medium term but a one-sided rally we saw last year is unlikely to be repeated this year,” Fukaya said.

The dollar rose about 14 percent versus the yen in 2014, reaching a 7-1/2 year high of 121.86 in December.

Sterling, hit Friday after weak U.K. manufacturing further diminished prospects of Bank of England hiking rates in 2015, fell to a fresh 17-month low in wake of the dollar’s overall gains.

The pound fell as low as $ 1.5185 before pulling back to $ 1.5291.

(Editing by Stephen Coates & Kim Coghill)