* ZEW index of investor sentiment rises second month in a row
* But remains negative, current conditions index drops
* ZEW economist: euro crisis remains biggest risk to economy
By Eva Kuehnen and Sakari Suoninen
MANNHEIM, Oct 16 (Reuters) - German analyst and investor sentiment rose for a second month in a row in October, a survey showed on Tuesday, suggesting fears that the euro zone's debt crisis will escalate and damage the bloc's largest economy are easing.
The Mannheim-based ZEW said sentiment appeared to have bottomed out, though it remains deep in negative territory and the assessment of current conditions in Germany worsened.
ZEW said its monthly poll of economic sentiment jumped to -11.5 in October from -18.2 in the previous month, beating the consensus forecast in a Reuters survey of analysts for a rise to -15.0 and sending the euro to a session high against the dollar.
"The improvement in the mood is continuing. The concerns over a renewed escalation of the euro zone debt crisis have eased appreciably and thus concerns about a further worsening of the economic situation," said VP Bank economist Bernd Hartmann.
"This could however be a false dawn. Even if the European Central Bank's moves have reduced the extreme risks, European countries, especially those on the periphery, are still facing great economic challenges."
The ECB's plan for potentially unlimited government bond-buying has raised some hopes on financial markets of an end to the most acute phase of the crisis.
But ZEW economists said the euro zone's debt crisis and the possibility that a member state may default remain the biggest risks to the German economy.
"There's still a risk that some countries in the euro area ... will default," said ZEW economist Marcus Kappler. "We do not see that at the moment, but the debt crisis is not over and there remains a lot of risks."
For a long time Germany's economy seemed impervious to the euro zone's troubles but growth slowed to 0.3 percent in the second quarter from 0.5 percent in the first as firms held back on investments due to uncertainty in the 17-nation bloc.
Recent data for Europe's powerhouse has been mostly disappointing, showing business sentiment and industrial orders slipping, the private sector contracting and unemployment rising.
A German government source said on Tuesday Chancellor Angela Merkel's cabinet would cut its expectations for economic growth next year to 1 percent from a previous 1.6 percent. The government is due to publish growth forecasts on Wednesday.
German industrial conglomerate Siemens said last week it aimed to slash production costs and could cut jobs to compete with its rivals, as business this year was proving tougher than it had expected.
In the ZEW survey, a gauge of current conditions eased to 10.0 from 12.6 in September, missing the consensus forecast in a Reuters poll for a reading of 11.3.
"The current situation is no longer as bright as once estimated but the outlook is looking better," said Jana Meier at HSBC Trinkaus. "This suggests that we will have passed the trough by the end of the year."
"Even though Germany will not avoid an economic slowdown it does not look as though there will be a recession."
The ZEW index was based on a survey of 288 analysts and investors conducted between Oct 1 and Oct 15, ZEW said.