* Euro rises, but stays below recent seven-week high
* German business sentiment falls more than expected in August
* Bernanke speaks on Friday, easing expectations could weigh on dollar
By Wanfeng Zhou
NEW YORK, Aug 27 The euro edged higher against the dollar on Monday after a bigger-than-expected drop in German business sentiment raised hopes the euro zone's largest economy will do more to revive the bloc's growth.
Sentiment towards the euro remained uncertain as markets awaited a series of key events next month, including the European Central Bank's policy meeting on Sept. 6, followed by the German Constitutional Court's ruling on the euro zone's permanent bailout fund on Sept. 12.
German business sentiment dropped for a fourth month in a row in August to reach its lowest level since March 2010, the Munich-based Ifo think tank said, with the business climate hit by increasing worries about the future level of exports.
"The news clearly shows that Germany cannot escape unharmed if the rest of the euro zone falls into a deep recession," said Boris Schlossberg, managing director of FX Strategy at BK Asset Managemen t in New York.
"Therefore policymakers may now temper their insistence on austerity and instead will pursue more simulative policies in order to revive growth."
The euro hit a session high of $1.253 5 on Reuters data after the Ifo survey was released , and was last up 0.1 percent at $1.2528.
It stayed well below a peak of $1.2589 set last Thursday, its highest since July 4. Traders cited strong offers above $1.2580 and option barriers at $1.2600.
Volumes were thin with London shut for a holiday.
Further gains in the euro are likely before U.S. Federal Reserve Chairman Ben Bernanke speaks at a central bankers' gathering in Jackson Hole, Wyoming on Friday amid expectations of another round of monetary easing from the U.S. central bank to stimulate sluggish growth.
Chicago Federal Reserve President Charles Evans said the U.S. central bank should immediately launch a fresh round of monetary stimulus and buy bonds for as long as it takes to produce a steady decline in the jobless rate.
The euro climbed 1.4 percent last week on optimism the ECB will soon start buying Spanish and Italian bonds to bring down borrowing costs in troubled euro zone economies.
Speculators trimmed bets against the euro to 123,932 contracts from 137,810 contracts in the week ended Aug. 21, data from the Commodity Futures Trading Commission showed on Friday.
Bets in favor of the U.S. dollar fell to $4.57 billion from $8.92 billion the previous week, the fifth straight weekly decline and the smallest net long position since September 2011.
Investors will closely watch a speech later on Monday by German ECB Executive Board member Joerg Asmussen, who said last week a Greek exit from the euro zone was manageable but not preferable, analysts said.
Underscoring challenges to a quick solution to the debt crisis, Germany's Bundesbank has likened the ECB's bond-buying plan to a dangerous drug and a conservative ally of the German leader said Greece should leave the currency bloc by next year.
"There's a lot of event risk, and I think this event risk will keep the euro capped," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong. He predicted the euro "will struggle to get above $1.26 this week".
Against the yen, the euro rose 0.1 percent to 98.52 yen. The dollar was flat at 78.68 yen.
The Australian dollar skidded to a one-month low of $1.0368 and looked vulnerable to further losses on fresh concerns about China's economy. The Aussie is often used to express views on the world's second largest economy.