FOREX-Euro supported, Aussie extends gains on ECB hopes

* Aussie extends gains, euro stays buoyed

* Hopes of ECB action this week underpin sentiment

* Italian bond sale later on Monday eyed

By Ian Chua

SYDNEY, July 30 (Reuters) - The Australian dollar extended gains to a four-month high while the euro hovered near a three-week peak on Monday amid hopes the European Central Bank will soon launch fresh action to tackle the euro zone debt crisis.

Hopes the Federal Reserve will also signal more bond-buying this week have further improved the market mood for risk assets.

"We continue to believe that EUR crosses are prone to upside risks as markets continue to price in further ECB action to lower sovereign debt risk-premia ahead of Thursday's ECB meeting," analysts at BNP Paribas wrote in a research note.

The euro bought $1.2309, not far off a three-week peak around $1.2390 set on Friday. Against the yen, it fetched 96.64 yen, having scaled a high around 97.33 late last week.

ECB President Mario Draghi last week vowed the central bank was ready to do whatever it takes to preserve the euro, holding out hope it would act soon to lower borrowing costs for highly indebted member countries such as Spain and Italy.

But highlighting resistance against such a move, Germany's Economy Minister Philipp Roesler warned the ECB about any large-scale government bond purchases.

The prospect of a good outcome for Italy's bond sale later on Monday has also improved thanks to Draghi. Italy is looking to raise around 5 billion euros in the debt market.

One of the biggest beneficiaries of the improvement in risk sentiment have been high-beta currencies including the Australian dollar.

The Aussie reached a four-month high around $1.0498 in early trade, surpassing last week's peak of $1.0489. Against the yen, it was at 82.20, within a whisker of Friday's 12-week high of 82.36.

A clear break of the psychologically key $1.0500 level will open up the way to $1.0556, a level representing the 76.4 percent retracement of the late February to early June fall.

Not surprisingly, investors shunned the dollar and the yen, safe-havens usually bought in times of heightened market stress. The dollar wallowed near a three-week trough against a basket of major currencies. On the yen, it traded at 78.50, having touched a one-week high of 78.68 last Friday.

Markets will also be keeping an eye on U.S. Treasury Secretary Timothy Geithner, who will meet German Finance Minister Wolfgang Schaeuble and Draghi on Monday.

The U.S. Treasury said Geithner and the officials will discuss the U.S., European and global economies at the meetings.