(Adds industrial production data, updates prices)
NEW YORK Aug 15 (Reuters) - The U.S. dollar weakened against the euro on Friday, erasing much of the week's gains, as investors that had bet on the greenback's strength closed out positions before the weekend.
Investors had been trimming short bets on the euro before the release of U.S. economic data on Friday, sending the greenback lower.
The dollar pared some of its weakness after data showed that U.S. industrial production edged higher in July, as production of auto parts and motor vehicles rose 10.1 percent.
Dollar weakness came even as tensions in the Ukraine were high. NATO accused the Kremlin on Friday of escalating the conflict, following reports that a small column of Russian armored vehicles crossed overnight into an area of Ukraine where pro-Moscow rebels are battling government forces.
"Players faced with a number of risks want to square up positions (going into the weekend), and they were likely long dollars," said Michael Woolfolk, global markets strategist at BNY Mellon in New York.
"It's confounding," he added. "It suggests that risk appetite is growing and geopolitical risks are de-escalating, which is the opposite of what we see in the headlines."
The dollar was last down 0.25 percent against the euro at US$1.3396, and was up 0.21 percent against the yen at 102.65 yen.
The euro has been weighed down over the past two weeks by concerns about the euro zone's economic prospects and expectations of more stimulus.
Other U.S. data on Friday showed that U.S. producer prices rose marginally in July, held back by a decline in the cost of energy. The Labor Department said on Friday its producer price index for final demand edged up 0.1 percent after a 0.4 percent increase in June.
Business conditions for manufacturers in New York state improved in August, albeit at a slower pace than expected, the New York Federal Reserve said in a report on Friday. The New York Fed's "Empire State" general business conditions index fell to 14.69 from July's 25.60, which was the highest since April 2010.
The dollar index dipped 0.16 percent to 81.599, although it was still trading near an 11-month high of 81.716 set last Wednesday. (Additional reporting by Anirban Nag in London; Editing by Lisa Von Ahn and Steve Orlofsky)