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LONDON, Feb 25 (Reuters) - Ukraine's hryvnia fell to record lows against the dollar on Tuesday while its dollar bonds tumbled as concerns grew about the ability of the country to pay its debts in the near-term.
A rally in Ukraine's dollar bonds that followed the weekend overthrow of president Viktor Yanukovich is fading quickly as investors fret over what conditions might be attached to any rescue package led by the International Monetary Fund.
An aid package involving the IMF typically promotes greater exchange rate flexibility, a factor that could provide an additional incentive for the cash-strapped central bank to stand aside and allow the currency to depreciate.
A floating hryvnia was a key pre-condition set by the IMF in failed talks with Ukraine last year on renewing its loan deal.
Also adding to the pressure were comments by Russia's Deputy Finance Minister Sergei Storchak who said there was a small risk that Ukraine may default on $3 billion in Eurobonds that Russia recently acquired as part of a $15 billion bailout deal. 1/2ID:nL6N0LU3O2 3/8
Further loans from Russia may be in doubt following the exit of Moscow-backed Yanukovich.
"People are focusing on reality now ... People are asking will there be debt restructuring," said Jeremy Brewin, head of emerging debt at ING Investment Management.
The hryvnia fell more than 6 percent on the day to 9.80 per dollar, on track for its biggest one-day loss since February 2009.
Ishitaa Sharma, a strategist at Citi said the hryvnia's slide was likely to add to jitters among the population, with many people left holding a depreciating currency.
"They are all looking for hard currency. There is no buyer out there for the hryvnia," Sharma said.
She added that the government was likely to have to accede to IMF demands for a flexible currency.
"From the recent willingness of the central bank to let the hryvnia depreciate, it looks like they should be willing to accept," she added.
Goldman Sachs estimates the country's reserves have declined to $12-14 billion. At end-January, the central bank had $17.8 billion in reserves, the lowest level since 2006.
The European Union's foreign policy chief promised Ukraine's new leaders strong international support, including to fight an economic crisis.
Ukraine's dollar bonds had enjoyed a 7-9 cent rally on Monday but slipped on Tuesday across all maturities.
The 2017 dollar bond was trading at 93.16 percent of its face value, down 3 percentage points on the day after rallying more than 10 points on Monday. State energy firm Naftogaz's dollar bond due Sept 2014 fell a similar amount, to trade at 90 percent of face value.
Ukraine's dollar bond due June 2014 fell 2 points to 94.6, according to Tradeweb. Other Ukraine dollar bonds due 2020, 2022 and 2023 fell more than 1 point.
Many of these bonds have been held by big institutional investors, including Franklin Templeton, according to end-December filings.
"When you get a substantial rally in the (Ukrainian bonds), you close your eyes and take some chips off the table. That's what we and many others are doing," said Steve Ellis, a bond fund manager at Fidelity Worldwide Investments.
(Reporting by Natsuko Waki and Sujata Rao; Editing by Catherine Evans)