* Euro drops to one-week low after euro zone, German data
* Fed announcement due at 2:15; likely to be non-event
* Dollar index rallies to two-week high
NEW YORK, Oct 24 (Reuters) - The euro edged lower against the dollar and yen on Wednesday after unexpectedly weak German data stoked concern the euro zone's largest economy may be headed for recession.
Traders, however, are shifting attention to an announcement from the Federal Reserve later in the day even as most expect it to be a non-event following the central bank's aggressive easing action in September.
Germany's Ifo business sentiment fell in October for a sixth consecutive month to the lowest since February 2010, data showed. Private sector activity also shrank for a sixth straight month as factory order books thinned and demand for exports weakened.
``This is particularly concerning as it highlights how the periphery's problems are leaking into the core,'' said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto. ``We expect the euro to trend lower into year-end and into 2013.''
The euro fell to a session low of $1.2918 on Reuters data, the lowest in a week, before paring losses to last trade at $1.2974, down 0.1 percent on the day.
It held between the recent range of $1.28 to $1.3170 that it has traded in since mid-September, while strong technical support was expected at $1.2835, the 200-day moving average.
Separate Purchasing Managers' Index data showed activity in the euro zone as a whole also contracted more sharply than forecast in October, suggesting the currency bloc's economic decline was deepening.
Expectations that indebted Spain is moving closer to asking for a bailout thereby enabling the European Central Bank to buy its bonds and lower borrowing costs, have helped support the euro in recent weeks. Uncertainty about the timing of such a request, however, has deterred investors from chasing the single currency higher.
``Investors are not very happy to put on long euro positions because of the uncertainty in Spain and worries about the euro zone economy,'' said Niels Christensen, currency strategist at Nordea in Copenhagen.
European Central Bank President Mario Draghi made a robust defence of his bond-buying plan to ease the euro zone's debt crisis, telling German lawmakers their fears of illegal funding of governments or stoking inflation are misplaced.
The euro also hit a one-week low against the yen at 102.96 yen and was last at 103.51, down 0.1 percent.
Euro weakness helped the dollar index hit a two-week high Of 80.151. The index was last at 79.902, down 0.1 percent.
The Federal Open Market Committee, the Fed's policy-setting panel, is scheduled to release a statement on its policy deliberations at around 2:15 p.m. (1815 GMT)
Analysts said the U.S. central bank is likely to hold off from taking fresh steps after the end of its two-day meeting, opting to review the impact of the significant action it took last month and keep a low profile in its last gathering before the Nov. 6 general election.
The dollar edged away from the psychologically key level of 80 yen, dipping 0.1 percent on the day to 79.79 yen.
Speculation of more monetary easing from the Bank of Japan on Oct. 30 has weighed on the yen in recent sessions and helped the dollar hit a three-month high of 80.02 yen on Tuesday.
The Australian dollar rallied 0.7 percent to $1.0340 as consumer price figures showed an unexpected uptick, dampening expectations the central bank will lower rates at its next meeting.