FOREX-Euro at 2-1/2 mth high vs dlr on strong German Ifo

* Upbeat German Ifo data lifts euro

* Euro at 2-1/2 mth high vs dollar, 3-1/2 mth high vs yen

* But seen struggling to hold onto gains

* Dollar/yen dips on profit-taking above 80 yen

By Jessica Mortimer

LONDON, Feb 23 (Reuters) - The euro rose to a 10-week high against the dollar and its strongest since November versus the yen on Thursday after better-than-expected German data eased concerns about a bleak euro zone economic outlook.

German business sentiment rose for the fourth month running in February, beating expectations and raising hopes that Europe's largest economy is improving and will avoid recession.

Euro gains were expected to be limited, however, due to conviction that Greece's latest bailout deal will not draw a line under it or the euro zone's debt crisis. That could mean the currency struggles to hold gains above $1.33.

Traders cited talk of Middle East accounts selling dollars, while the euro was buoyed by investors cutting bearish bets against a number of currencies. Sterling in particular was hit by concerns about further UK monetary easing.

The euro rose as high as $1.3330, breaking above resistance at the 100-day moving average around $1.3305 and the Feb. 9 high of $1.3322 to reach its strongest since mid-December. It was last up 0.5 percent at $1.3311.

Against the yen, the single currency rose to 106.826 yen, its strongest since mid-November as the Japanese currency remained under pressure after recent monetary easing there.

"A better German Ifo index could help euro/dollar," said Ankita Dudani, currency strategist at RBS. But she added it would be tricky for the euro to break firmly above its $1.30-$1.33 range.

"The euro will probably reverse this uptrend because the PSI deal on Greece still has to be done and we are edging closer to the March 20 deadline (when Greek bond redemptions are due) so there are many things that could wobble."

Analysts at Morgan Stanley said in a note to clients that they continue to advise selling euro/dollar on rebounds and lowered their entry level to $1.3300.

Focus will soon turn to the European Central Bank's next long-term refinancing operation next week. Although a high take-up could give the euro and other riskier assets a short-term boost, in the longer-term there are worries that ECB policy amounts to quantitative easing and will weigh on the single currency.

The ECB is expected to lend nearly 500 billion euros to banks, although some forecasts were as high as 1 trillion euros.

The euro also rose to a 10-week high versus sterling as the pound remained under pressure after Bank of England minutes raised the possibility of more quantitative easing later in the year.

"EURUSD remains fairly bid largely due to both the short squeeze seen in EUR crosses, particularly EURCAD, EURAUD, EURNZD and potentially (central bank) reserve managers recycling their USD revenues into euros as oil prices rise," analysts at BNP Paribas wrote in a note.

Central banks in oil producing countries, whose revenues tend to come in dollars, hold their foreign exchange reserves in range of currencies.

DOLLAR/YEN OFF HIGHS

The dollar fell 0.15 percent against the yen to 80.15 yen, off a seven-month high of 80.406 yen hit on Wednesday as Japanese exporters and short-term players took profit above the 80 pence level and ahead of an options barrier reported at 80.50 yen.

Part of the reason for the yen's weakness is the Bank of Japan's surprise easing of monetary policy last week but there is now growing momentum as key support levels give way, spurring more selling.

The dollar's surge over the past few weeks has stirred talk that the greenback's down-trend versus the Japanese currency since mid-2007 may be drawing to a close.

"I think it's quite possible, but I have always thought the long-term move higher in dollar/yen will only happen when it looks like U.S. rates will move up in the near term," said Adam Gilmour, head of FX and derivatives sales, Asia-Pacific, for Citigroup in Singapore.

"I am a little cautious about being too enthusiastic here," he said.