FOREX-Euro rallies on Spain speculation, better sentiment

* Spain bailout request eyed, but uncertainty remains

* Yen undermined by BOJ easing speculation, Softbank deal

NEW YORK Oct 16 (Reuters) - The euro rose to a one-week high against the dollar and four-week high against the yen and sterling on Tuesday with traders citing a media report that Germany was open to a precautionary line of credit for Spain.

The euro was already higher, helped by persistent talk Spain may soon ask for a bailout and tentative signs of improving confidence in the German economy, but speculation that Germany may not want Spain to wait for help prompted a sharp advance higher in the euro zone common currency.

A German ZEW survey showed analyst and investor sentiment rose for the second month in a row in October, although it remained in negative territory.

Adding to positive sentiment, Prime Minister Antonis Samaras said on Monday that Greece will conclude talks to continue receiving the bailout funds it needs but officials said the talks would most likely not be finished by Thursday's EU summit.

"It's a risk-on market with good news out of Europe," said Marc Principato, director of SMB Forex Trading And Education in New York. "The larger technical structure has been implying strength since the 1.2800 area low and the euro/dollar is consolidating recent gains."

The euro rose 0.8 percent on the day to $1.3048, with the peak at $1.3060, its highest level in a week. A break above $1.3072 would target the mid-September high of $1.31729.

The euro rose 1.1 percent to 102.89 yen and touched 81.02 pence against the pound.

A Spanish aid request would prompt the European Central Bank to start buying Spanish bonds to bring down its borrowing costs. Analysts and traders say this would buoy the euro, though uncertainty remains over when Spain will make a move.

Although hopes that Spain could ask for financial aid at a European Union summit this week have waxed and waned, euro zone officials have always said it may do so next month. The request would probably be dealt with alongside a revised loan program for Greece and a bailout for Cyprus.

"I am still bullish on euro/dollar, the next stage will be Spain to ask for the bailout and that will boost the euro," said Daragh Maher, currency strategist at HSBC In London. He forecast the euro to rise to $1.35 by year-end.

YEN WEAKENS

Speculation of more easing from the Bank of Japan weighed on the Japanese currency. The dollar rose to 78.94 yen, its strongest since Sept. 19. It was last at 78.88 yen.

"There seems to be pressure piling on the Bank of Japan to take action later this month. People are expecting more stimulus from the BOJ," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank in Tokyo, referring to the bank's policy meeting on Oct. 30.

Japanese mobile operator Softbank's $20 billion purchase of U.S. third-largest wireless company Sprint Nextel, the largest foreign acquisition ever by a Japanese firm, has also encouraged dollar buying against the yen.

But the yen could be resilient if worries over global growth strengthen. The Japanese currency tends to rise in times of economic stress due to Japan's net creditor status.

The dollar also fell to a four-week low against the Swiss franc.

A report showing U.S. consumer prices rose in September as the cost of gasoline surged, posing a threat to consumers' spending power, had little impact on trading given faster inflation looked unlikely to derail the Federal Reserve's ultra-easy policy path.