FOREX-Euro off lows, but rescue fund uncertainty drags

                                
 * Euro pares losses, but down 0.3 pct vs dollar
                                
 * Fading expectations over EFSF talks dent sentiment
                                
 * ECB's Orphanides plays down talk of tighter policy
                                
 * U.S. markets shut for holiday
                                
 
                                
 (Adds quote, detail)
                                
 By Neal Armstrong
LONDON, Jan 17 (Reuters) - The euro fell broadly on Monday
as hopes for an immediate increase in the euro zone's bailout
fund faded and as investors reassessed a recent rise in European
Central Bank interest rate expectations.
                                
 Uncertainty about whether Germany would support an increase
in the effective lending capacity of the bailout fund, known as
the European Financial Stability Facility (EFSF), put pressure
on the euro as attention was focused on a meeting of euro zone
finance ministers. The subject is expected to dominate the
meeting. [ID:nLDE70F09T]
                                
 The euro traded at $1.3335 <EUR=>, down 0.3 percent on the
day after falling to as low as $1.3243 on trading platform EBS.
Traders said decent buying by Irish banks helped the euro
recover from those lows.
                                
 Still, it was off a one-month high of $1.3458 hit on Friday
when speculators went long after solid debt auctions by Spain
and Portugal and hawkish comments on inflation from European
Central Bank President Jean-Claude Trichet and hopes that euro
zone policymakers may expand their rescue funds.
                                
 German Finance Minister Wolfgang Schaeuble was quoted ruling
out bolstering the size of the EFSF. [ID:nLDE70G0C3] Senior
European sources told Reuters the sense of urgency in Berlin for
boosting the fund had diminished after the successful bond
auctions in Spain and Portugal, the two countries seen most at
risk of needing any further bailouts.
                                
 Instead Germany is pushing for broader anti-crisis measures
to be agreed at a summit of European Union leaders in March.
                                
 "It's becoming increasingly apparent that Germany doesn't
want an increase in the rescue fund and that's weighing on euro
sentiment today because there were positive expectations
building last week," said Manuel Oliveri, currency strategist at
UBS in Zurich.
                                
 "We believe the euro is a sell on rallies because investors
are not minded to buy euro-denominated assets while structural
problems in the euro zone persist," he added.
                                
 Spain cancelled on Monday a proposed bond auction slated for
later in the week, opting for a syndicated bond issue instead,
which rattled investor confidence and gave another reason to
sell the euro as peripheral bond spreads widened over German
benchmarks. [ID:nLDE70G0PQ]
                                
 
                                
 RATE EXPECTATIONS
                                
 ECB policymaker Athanasios Orphanides added pressure on the
euro by playing down euro zone rate hike expectations, which
rose last week after the ECB hinted it was ready to act to curb
inflation if necessary.
                                
 Orphanides said the ECB statement on Thursday had not been
"overly hawkish" and that there was sometimes an overreaction to
the bank's underlying message. [ID:nLDE70G0VB]
                                
 Analysts, however, said that with inflation looking to pick
up in coming months, rate hike expectations would not go away in
a hurry.
                                
 "The markets will not short a position knowing inflation is
on the way up," said Chris Turner, head of FX strategy at ING.
                                
 The three-month Euribor rate -- traditionally the main gauge
of unsecured interbank euro lending and a mix of interest rate
expectations and banks' appetite for lending -- rose to 1.009
percent on Monday from 1.006 percent.
                                
 The dollar was flat against a currency basket <.DXY> at
79.148 while traders said a U.S. public holiday on Monday would
reduce liquidity into the European afternoon.
                                
 The dollar was down on the yen, easing to 82.39 yen <JPY=>,
but within its well-worn range of the past few weeks. The yen
was also stronger against the euro with the single currency
shedding nearly 1 percent against the Japanese unit. The euro
was down 0.94 percent at 109.91 yen <EURJPY=R>.
                                
 Sterling advanced to a eight-week high against the dollar,
bolstered by rising speculation that UK inflation pressures
could prompt the Bank of England to raise interest rates as
early as June. The pound rose to as high as $1.5917 <GBP=D4>,
its strongest since late November, and moving past option
barriers at $1.5900.
 (Additional reporting by Anirban Nag)
 (Editing by Catherine Evans and Susan Fenton)