FOREX-Euro buoyed by expectation Spain closer to aid request
* Euro recovers from Thursday's sell-off, trades above $1.30
* Sources say Spain making plans to meet aid conditions
* Spain aid request would boost euro but gains seen limited
* Sterling rises to near 13-month high against dollar
LONDON, Sept 21 (Reuters) - The euro climbed on Friday as speculation Spain may soon request aid enabled it to recover ground lost the previous day.
More gains could see it target a four-and-a-half month peak of $1.31729 reached early this week, though traders said it was likely to struggle to reach those levels unless Spain makes a decisive move towards seeking a bailout.
The euro rose 0.5 percent to a high of $1.3048, extending gains after it broke through reported stop loss buy orders above $1.30, with traders citing demand from Middle East investors.
Sources told Reuters Spain is considering freezing pensions and speeding up a rise in the retirement aid as it attempts to meet conditions of an international aid package.
This helped the euro recover strongly from a low of $1.2919 reached on Thursday, when it was dented by weak euro zone business surveys on Thursday which stoked concerns about a deepening recession.
"If the euro closes above $1.30 this week we could see the euro drift higher next week," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec.
"There is still prevailing dollar weakness from quantitative easing in the U.S. and the euro has come out in a new range which looks like it will be more stubborn."
The dollar fell 0.4 percent against a basket of currencies, with the its index at 79.112, bringing it closer to a six-and-a-half month low of 78.601 hit last week in the wake of aggressive monetary easing by the U.S. Federal Reserve.
Support for the euro was seen at Thursday's low, which stood just above its 233-day moving average at $1.2915.
"It is just a matter of time before Spain applies for financing in the coming weeks and that will be euro positive," said Carl Hammer, chief currency strategist at SEB in Stockholm.
He expected the euro to rise, with a target of $1.31 or slightly higher in one month's time. However, he said it would peak at not more than $1.34-$1.35, adding that Spain applying for funding would be "the last piece of euro-positive news".
"We are coming to the point where most of the good news for the euro is discounted."
Sterling also rose to its highest in nearly 13 months against the dollar at $1.6310, helped by UK public borrowing data that was not as bad as expected.
Riskier currencies and equities rose broadly, with the high-yielding Australian dollar climbing 0.8 percent to $1.0519.
The euro has been buoyed recently by a the European Central Bank plan to buy the bonds of indebted euro zone countries - but it can only do that once that country requests aid.
Spanish Prime Minister Mariano Rajoy has so far hesitated over seeking a bailout, creating uncertainty in financial markets.
There are also uncertainties regarding Greece, with negotiators still short of a deal that would unlock the next instalment of the country's 31.5-billion-euro bailout package.
"Two key questions. When is Spain going to ask for help, and will Greece be given the time and the money to effectively disappear off the radar screens for another six months or so?" said Gareth Berry, G10 FX strategist for UBS in Singapore.
The dollar was steady at 78.22 yen, well below a one-month high of 79.23 yen hit on Wednesday after the Bank of Japan boosted its asset-buying programme to help fuel the country's economic recovery.
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