FOREX-Euro hits 2-mth highs on Greece hopes; ECB awaited

* Greece parties agree on bailout package except pensions

* Market remains hopeful deal will be reached

* ECB seen leaving rates on hold but may signal March cut

* Further gains in euro seen hard given Europe debt problems

By Jessica Mortimer

LONDON, Feb 9 (Reuters) - The euro hit two-month highs against the dollar and yen on Thursday as hopes Greece would clinch a bailout deal encouraged investors to unwind bearish positions, though sentiment was cautious before a euro zone policy decision.

Although the European Central Bank is seen leaving rates on hold, many believe it will signal a readiness to cut interest rates in March which may temper gains in the euro.

However, with the market focused on short-term optimism that Greece will avoid a messy default, analysts said the euro would stay supported and may push higher, until worries return about unsustainable debt levels in some euro zone countries.

Greek political leaders have agreed on all points of a bailout package except one -- pension cuts -- and officials said discussions with international lenders would continue so a deal could be concluded before a meeting of euro zone finance ministers on Thursday.

The euro was up 0.3 percent at $1.3294 against the dollar , having risen as high as $1.3313, its strongest since mid-December. Its next target is the 100-day moving average around $1.3331.

"Short-term optimism played out and the euro went above $1.33 on the view that there would be a deal sooner rather than later," said Jeremy Stretch, currency strategist at CIBC.

"I suspect this risk rally may have a little further to run - until people realise that the expansion of the ECB's balance sheet is not a positive and the debt dynamics of Greece are not sustainable."

The ECB meeting was expected to be seen as secondary to developments with Greece, with few expecting a rate cut this month or new liquidity measures to support the banking sector.

Some analysts said ECB President Mario Draghi may strike a mildly upbeat tone, pointing to the recent improvement in euro zone purchasing managers' data as a sign that recent liquidity measures have had a positive impact. However, he is likely to face tough questions about the ECB's Greek bond holdings.

Against the yen, the euro rose as high as 102.766 yen on EBS trading platform, also its strongest since mid-December.

Elsewhere, sterling was in focus ahead of a Bank of England policy meeting that is expected to result in a further 50 billion pounds of quantitative easing in a bid to boost the UK's flagging economy.

Stronger-than-expected industry data gave the UK currency an early lift.

GREECE FOCUS

Market players say the euro could gain further if Greece clinches a debt restructuring deal, given that speculators still held near record short positions in the currency.

But they also said any deal would likely offer only a short-term boost to the euro given ongoing uncertainties about Greece and other euro-zone economies.

"This euphoria is out of line with relative interest rate trends, let alone recent economic data, but the spike can go on. Bears are still being squeezed and positions are still sufficient in size and quantity to provide fuel for the short-covering," Societe Generale analysts said in a note to clients.

The euro has gained more than 5 percent from a 17-month low of $1.2624 hit in January as the market has bet Greece will hammer out its second bailout deal with international lenders.

But Italy's economy, the currency bloc's third-largest, likely contracted in the fourth quarter, while countries such as Spain and Belgium have already reported contraction in the same quarter.

Helping the euro has been a broad rally in riskier assets, with the ECB implementing a much easier policy stance and the Federal Reserve pledging to keep interest rates at record lows for a prolonged period.

The dollar index fell to a two-month low of 78.407, while the higher-yielding Australian dollar was up 0.2 percent at $1.0812, close to a six-month high of $1.0845 hit on Wednesday.

However, the dollar rose versus the safe-haven yen. It hit 77.243 yen, its highest in nearly two weeks, though traders see limited chances of the U.S. currency breaking above last month's high of 78.29 yen given offers from Japanese exporters lined up towards 78 yen.