FOREX-Yen on the defensive as BOJ policy decision nears

* Dollar drifts back towards four-month highs vs yen

* BOJ likely to boost asset-buying by at least Y10 trln

* BOJ meeting outcome due 0330-0530 GMT

SYDNEY, Oct 30 (Reuters) - The yen held near four-month lows versus the dollar on Tuesday as markets counted down to a certain policy easing by the Bank of Japan, though investors fear it will again stop short of the bold action the economy needs.

The dollar bought 79.80 yen, not far off Friday's peak of 80.38. Immediate support is seen around 79.20/25 yen, a level that had seen some buying interest in the past.

Markets expect the BOJ to expand its asset-buying programme by at least 10 trillion yen ($125 billion), although talk is that it could be as high as 20 trillion yen. Still, the BOJ has tended to undershoot market expectations.

If it were to disappoint, traders said bearish yen positions could be unwound, leading to a sharp rise in the Japanese currency. BNP Paribas strategists have recommended shorting USD/JPY at 79.65, targeting 77.00, with a stop at 80.70.

Elsewhere, the euro stood at $1.2903, having drifted in a narrow $1.2885/1.2944 range on Monday in subdued trade as U.S. markets were mostly shut due to Hurricane Sandy.

The single currency has been struggling to break out of a wider $1.2800/3200 range set in the previous few weeks as investors waited for Spain to seek a bailout and trigger the European Central Bank's bond-buying programme.

Spanish Prime Minister Mariano Rajoy kept financial markets guessing on Monday, saying he would seek a credit line from the euro zone's rescue fund ``when I think it is in the interests of Spain''.

His comments came even after data showed retail sales in the country fell at their fastest pace on record, further darkening the outlook for an economy already mired in recession.

``Spain's economy is suffering terribly, which will continue to hit government revenues and a modest decline in bond yields will not solve the problem,'' said Kit Juckes, strategist at Societe Generale.

The lacklustre euro, however, helped the dollar index edge up to a seven-week high of 80.325, pulling well away from the October trough of 78.935.

Also showing no inclination to break new ground, the Australian dollar was at $1.0332, having drifted between $1.0322/67 on Monday in directionless trade.

Last week, it fell to $1.0230 and then quickly rebounded to $1.0398 in moves likely to keep Aussie-dollar bears cautious.