FOREX-Euro rises on healthy Spanish auction, ECB in focus

* Euro rises as Spain hits top end of target at bond sale

* Stays vulnerable to hints of future policy easing by ECB

* ECB seen holding rates when decision announced at 1245 GMT

* Dollar settles near 6-1/2 month high vs basket of currencies

LONDON, March 7 (Reuters) - The euro rose against the dollar on Thursday after a healthy Spanish debt auction somewhat eased worries about the euro zone, although the single currency stayed vulnerable before the outcome of the ECB's monthly meeting. Spain sold 5 billion euros ($6.5 billion) at a triple-bond auction, hitting the top end of its targeted amount and with lower borrowing costs despite political uncertainty in Italy.

The single currency had earlier edged up as some sovereign investors pared recent bets against it. But traders said these gains were likely to be fleeting and euro/dollar could slip to three-month lows if European Central Bank president Mario Draghi hints at interest rate cuts at his press conference at 1330 GMT. The ECB is expected to keep rates on hold. Some strategists said there was an outside risk the euro could rebound slightly if Draghi did not sound too downbeat about the euro zone's prospects. "The Spanish auction shows there is still demand (for its debt) which is positive and a little bit surprising considering what is happening in Italy," said Richard Falkenhall, currency strategist at SEB. "On the ECB, they will probably disappoint, because there are some investors betting the ECB will have a dovish tone which may not happen and you could see a small euro-positive reaction," he said, adding the euro could rise to $1.31 but not much higher. The euro was up 0.4 percent at $1.3013. But it stayed susceptible to losses and could retest last week's near three-month low of $1.2966, below which it could fall to December's low of $1.2876. Resistance was cited at $1.3126, the euro's 100-day moving average. It is likely to struggle to make decisive gains against the dollar given investors are snapping up the U.S. currency on the back of good U.S. economic data and bets the Federal Reserve may halt its asset purchase programme towards the end of the year. In contrast, the ECB is likely to downgrade its staff projections for inflation and growth, all of which could see interest rate differentials move in favour of the dollar. "On balance we are negative euro and it will see a steady grind lower because of the elevated level of risk," said Adam Cole, global head of FX strategy at RBC Capital Markets. Analysts at Morgan Stanley said they expect the euro to decline towards the $1.2880/50 area initially and then towards their $1.2660 target.

DOLLAR RISES The dollar index last stood at 82.425, having risen to 82.604, its highest since Aug. 20, in late Wednesday trade. It has rallied more than 4 percent from this year's trough of 78.918 plumbed on Feb. 1. Better-than-expected U.S. jobs data on Wednesday boosted the dollar and indicated that Friday's U.S. non-farm payrolls will surprise on the upside and the Fed might be the first major central bank to pull the plug on stimulus, while the others continue to ease. Against the yen, the dollar was up 0.1 percent at 94.16 , moving closer to a 33-month peak of 94.77 reached on Feb. 25. Earlier on Thursday, the Bank of Japan stayed on hold, but the yen weakened against the dollar on expectations of aggressive policy easing in the future. Some strategists have revised their forecasts to show sustained yen weakness. UBS have changed their end-2013 forecast for the dollar to 100 yen from their earlier prediction of 85 yen. The BOJ meeting on Thursday was the last policy meeting chaired by outgoing Governor Masaaki Shirakawa, with markets expecting fresh stimulus measures at one of its meetings in April under a new governor. Sterling meanwhile fell to a 2-1/2-year low of $1.4965, as some in the market positioned for more stimulus from the Bank of England as early as on Thursday as the British economy faces the threat of a triple-dip recession.