FOREX-Dollar reaches 4-month high vs yen on BOJ easing bets

* Dollar hits four-month high vs Japan's yen on BOJ easing bets

* Euro falls as Spain bailout uncertainty continues to weigh

* U.S. third quarter GDP eyed

* Sterling outperforms on strong UK GDP data

NEW YORK, Oct 25 (Reuters) - The dollar rallied to a four-month high against the yen on Thursday as a rise in Treasury yields and expectations the Bank of Japan will ease monetary policy next week had investors broadly selling the Japanese currency.

The greenback has gained almost 3 percent versus the yen so far in October, its strongest monthly performance since February. Expectations that the Bank of Japan will take action on Oct. 30 to stimulate the Japanese economy and higher U.S. Treasury yields have made the dollar more attractive to investors.

U.S. benchmark Treasury yields touched a five-week high a day after the Federal Reserve stuck to its monetary policy, prompting some bond market investors to book profits. The dollar/yen currency pair is highly correlated to bond yields.

The Federal Reserve last month launched a third round of its bond-buying program, known as quantitative easing. There are high expectations that the Bank of Japan will expand the total size of its asset purchase program next week, with some speculating the size at 10 trillion yen ($124.74 billion).

If speculation holds true, the increased size of the bond buying would be same amount announced by Japan's central bank in September and would also mark the second straight month of policy easing.

``Given the escalation of anti-yen bets ahead of next week's meeting, the yen would be well placed to rally if policymakers don't take the aggressive action that investors have currently priced in,'' said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, D.C.

The dollar hit a peak of 80.33 yen, its highest since June 25. That came despite reported heavy offers just above 80 yen and traders said further gains could take it toward the late-June peak of 80.59 yen. It last traded at 80.24, up 0.6 percent on the day.

The euro last traded at 103.92 yen, up 0.4 percent on the day, but below a 5-1/2-month peak of 104.59 yen hit earlier this week.

A string of U.S. data mostly favored the dollar. Recent upbeat data has highlighted a growing economic disparity between the U.S. economy compared with Japan and the euro zone.

A gauge of planned U.S. business spending was flat in September while new orders for long-lasting manufactured goods increased during the month.

Other data showed a decrease in the number of Americans filing new claims for unemployment benefits last week. Contracts to buy previously owned U.S. homes rose far less than expected in September.

Looking ahead, price action for the dollar on Friday could be swayed by the first reading of third quarter U.S. gross domestic product, forecast to show 1.7 percent growth, according to a recent Reuters poll.

The euro fell 0.2 percent against the dollar, last trading at $1.2948.

European Central Bank President Mario Draghi on Wednesday told German lawmakers that fears of illegal funding of governments or stoking inflation were misplaced.

Arne Lohmann Rasmussen, head of FX research at Danske Bank in Copenhagen, said Draghi's comments showed he ``is committed to what he is saying, and that some of the tail risk has been removed from the euro.''

The euro's upside is widely seen as limited as long as uncertainty persists about whether Spain, the region's fourth largest economy, will seek a bailout. The euro hit a one-week low of $1.2918 on Wednesday on weak German business activity and sentiment data.

Comments from a Chinese ministry that the country's factory output should pick up toward the end of the year and a survey showing Chinese orders at their highest levels in months also underpinned investor sentiment.

The British pound outperformed after third-quarter GDP figures showed the economy had lifted out of recession and lessened the chances of more monetary easing next month by the Bank of England.

Sterling jumped 0.6 percent to a one-week high of $1.6144 , although economists say one-off factors related to the London Olympic games may mask underlying weakness and the negative influence of the euro zone crisis.