FOREX-Euro higher but remains pressured in thin summer volume

* ECB downplays report on bond buying

* Der Spiegel says ECB considering setting yield thresholds

* Euro drops, though its falls seen limited

* Dollar hovers near 5-week high versus yen

NEW YORK, Aug 20 (Reuters) - The euro traded higher against the dollar on Monday, recovering from earlier declines in illiquid markets as investors bet that the fall as New York trading opened was too far and too fast, based on speculation rather than fundamentals.

The euro earlier slipped after the European Central Bank brushed aside a report in Germany's Der Spiegel magazine that it was considering setting yield thresholds for any moves to buy the bonds of the euro zone's struggling sovereign debtors.

The ECB said it was misleading to report on decisions that had not yet been taken. Traders said the Der Spiegel report had earlier boosted the euro by lending weight to the view that the ECB would revive its controversial bond-buying program.

That came even as Germany's central bank reasserted its concerns about ECB bond-buying, which it said posed "considerable risks to stability" despite the gains midway through the session.

Yet investors were also wary of selling the euro too aggressively given even the limited risk of the ECB taking action once the European summer holiday season ends.

"There are back-and-forth comments regarding ECB actions," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C. "All of this is taking place against the subdued late summer trading backdrop so I wouldn't read too much into any of this."

The euro rose 0.1 percent to $1.2344, nearer to the session peak of $1.2368 than the session low of $1.2293, though it stayed within the $1.2240-1.2450 trading range seen in recent weeks.

"This is a professional trading environment not characterized by the long-term investor," said Michael Woolfolk, an FX strategist with BNY Mellon in New York. "The current mood is modestly risk-on, but not because they want to take on more long euro positions, but rather less short euro positions."

Market players have been wary about German opposition to ECB bond-buying. But last week German Chancellor Angela Merkel offered a robust defense of ECB chief Mario Draghi, who has been widely criticized in Germany for promising to do "whatever it takes to preserve the euro" and signaling his readiness to resume the controversial bond buying program.

Against the yen, the euro fell 0.1 percent to 98 yen , but it hovered near a six-week high of 98.40 yen hit on Friday as the prospect of ECB action kept investors positive and weighed on the safe-haven Japanese currency.

Morgan Stanley analysts recommended buying the euro against the yen on expectations Merkel will "maintain support for the Draghi plan," and that "positive rhetoric will likely continue," adding that investors remain short of the euro against the yen.

They advise buying at 97.00 yen with a target of 101.60 yen and a stop at 95.70.

"We expect policy events in Europe to continue to provide the euro with broad support in the near term, despite the prospect of continued weak growth indicators," they said in a note to clients.

The provisional estimates to euro zone purchasing managers' surveys are due for release on Thursday while traders awaited possible hints on a euro zone crisis solution later this week.

French President Francois Hollande and German Chancellor Angela Merkel will meet on Thursday, a day before Greek Prime Minister Antonis Samaras arrives in Berlin.

The dollar was changing hands down 0.2 percent at 79.41 yen , after having hit a five-week high of 79.66 yen in early Asian trade. Despite the recent move, analysts said the dollar should continue to gain from improvements in U.S. economic data that have lifted Treasury debt yields.

"The yen will continue to stay under pressure as investors are more willing to take on risk on expectations that something positive will emerge from the euro zone in the near term," said Adam Myers, currency strategist at Credit Agricole in London. "Any disappointment will see the yen being bought again."

Movements in the dollar against the yen tend to have a strong correlation with the spread between U.S. and Japanese yields.

Analysts say if Federal Reserve minutes later this week show there has been an active discussion at the U.S. central bank to provide additional monetary stimulus, this could put the dollar back under pressure and generate a rally in higher-risk assets.