* M&A talk in pharma sector lifts European shares
* Euro dips to 2-week low, Chinese yuan falls to 14-mth lows
* Ukraine tension seen as threat to riskier assets
By Marius Zaharia
LONDON, April 22 (Reuters) - M&A talk in the pharmaceutical sector lifted European shares on Tuesday, but failed to support the euro, which held at a two week low against the dollar on rising expectations of further policy easing by the European Central Bank.
China's yuan fell to its softest against the dollar in 14 months, after the central bank set a lower official midpoint of its trading range, highlighting its desire for a weaker currency to manage an economic slowdown.
British newspaper Sunday Times said U.S. pharmaceutical giant Pfizer had approached British rival AstraZeneca to propose a 60 billion pound ($101 billion) takeover. Both companies declined comment to Reuters.
Eli Lilly and Co said on Tuesday it would buy Novartis AG's animal health business for $5.4 billion in cash to strengthen and diversify its Elanco unit.
The FTSEurofirst 300 index of top European shares was up 0.5 percent at 1,335.88 points, building on last week's gains on the back of largely better-than-expected results by U.S. companies.
"We've got steady earnings coming out of the U.S., and the mergers and acquisition news doesn't do us any harm either," said Terry Torrison, managing director at McLaren Securities.
The stronger European stock market failed to lift the euro, which dipped to a two-week low of $1.3783.
ECB Executive Board member Yves Mersch said on Thursday, before a four-day weekend in Europe due to the Easter holiday, that sustained appreciation of the euro would inevitably trigger a reaction by the central bank.
The comments were the latest in a series of efforts by ECB policymakers, including President Mario Draghi, to talk down the euro currency as they try to fight ultra-low inflation and keep the currency union's economic recovery on track.
Euro zone inflation is running at 0.5 percent, far below the ECB's target of just under 2 percent over the medium term, keeping speculation rife that the ECB may soon turn on the money printing presses and launch a programme of asset purchases.
Business sentiment surveys such as the euro zone PMIs and the German Ifo could alter those expectations this week. Draghi is also due to give a keynote speech in Amsterdam on Thursday.
"Euro/dollar is likely to trade with a weaker bias this week given the German IFO and Draghi's speech coming up," said Yujiro Goto, currency analyst at Nomura."
The ECB outlook is a key factor behind this year's rally in lower-rated euro zone government bonds. Junk-rated Portugal will sell up to 750 million euros in 10-year bonds on Wednesday in its first bond auction since April 2011, pursuing a full return to market financing as the end of its EU/IMF bailout approaches.
Portuguese 10-year yields hit their lowest in eight years at 3.66 percent last week, having fallen from crisis highs of over 15 percent in the past two years.
German Bund yields, the benchmark for euro zone borrowing costs, edged 1 basis point higher to 1.53 percent.
Meanwhile, investors continued to see tensions in Ukraine as a threat to riskier assets, even though they seemed to be having less of an impact on safe-haven currencies such as the Japanese yen and other markets this week.
"I don't think this will lead to a military conflict. Nonetheless, towards the presidential election in Ukraine (planned for May 25), more tensions are likely and there will be phases where share prices will be hit," said Soichiro Monji, chief strategist at Daiwa SB Investments in Tokyo.
Following a gunfight that killed at least three on Sunday, Washington and Moscow each continued to put the onus on the other to ensure tensions are eased.
Washington threatened to impose additional sanctions against Russia "in days" if Russia does not implement an agreement struck last week to dampen down the standoff.
Oil prices were supported by worries over Ukraine. U.S. crude futures stood at $104.17 per barrel, near a six-week high of $104.99 hit on Thursday. Russian shares fell. (Additional reporting by Hideyuki Sano and Vidya Ranganathan in Tokyo and Anirban Nag and Sudip Kar-Gupta in London; Editing by Alison Williams)