FOREX-Dlr holds firm; rate outlooks reassessed

* Dollar rally gathers steam, dlr index at 1-month high

* ECB rate outlook tempered

* M+A activity back on radars, with InBev offer

* Peripheral jitters on Irish EU referendum

(Changes dateline, byline, adds quotes, updates prices)

By Veronica Brown

LONDON, June 12 (Reuters) - The dollar hit a one-month high versus a basket of major currencies, while the euro fell sharply on Thursday with investors continuing to reassess U.S. and euro zone rate expectations.

Merger and acquisition activity also pressured euro/dollar, with Belgium-based InBev -- the world's largest beer producer by volume -- launching a $46.3 billion bid for U.S. maker of Budweiser and Michelob. If successful, that would be the third largest ever foreign takeover of a U.S. company [ID:nL12592065].

Euro sentiment was further undermined as France's economy minister Christine Lagarde cast a shadow over expectations for a European Central Bank rate hike in July [ID:nPAB004122].

This followed comments on Wednesday from ECB Executive Board member Jeurgen Stark who said the central bank is not considering a series of rate rises, after ECB chairman Jean-Claude Trichet flagged a possible July rate hike last week [ID:nWEA9196].

At the same time, the U.S. Treasury and Federal Reserve have cranked up anti-inflationary language, marking a significant shift in policy stance there.

"Now we're seeing a dose of reality being kicked into interest rate sentiment, at least in the short term. Trichet in my mind was very deliberate in terms of what he said in terms of a possible rate hike in July," Rabobank strategist Jeremy Stretch said.

"But beyond there I think the window of opportunity for the ECB is very small and very narrow and Mr Stark et al have re-identified that as the underlying rationale," he added.

Analysts also cited peripheral jitters as Ireland kicked off polling on a referendum over EU reforms.

By 0854 GMT, the dollar was up 0.67 percent versus a basket of six major currencies at 73.743 .DXY, having hit a one-month high of 73.888. The euro fell as much as 1 percent to $1.5394 -- its lowest in a week.

The dollar rose 0.6 percent 107.46 yen JPY=, back near a four-month peak of 107.75 struck the previous day.

INFLATION TUSSLE

Policymakers in the U.S. and euro area have been outdoing each other with inflation busting language, boosting the euro and dollar in turn over the past week.

Analysts say markets have probably gone too far in seeing the possibility of three Fed interest rate hikes this year FEDWATCH especially when the economy is already grappling with a sharp housing decline and record high oil prices.

Any reassessment of how much the Fed could lift rates from 2 percent later in the year may drive the dollar lower, given the albeit tempered ECB expectations.

"We believe the market is being overly aggressive in its expectations for the timing and pace of the Fed's removal of policy accommodation," Calyon strategists said in a note to clients.

A data distraction may come in the form of U.S. retail sales at 1230 GMT, with investors watching to see how much impact tax rebate cheques might have had on consumption. Economists polled by Reuters expect sales rose 0.7 percent on the month in May.

The outcome of Ireland's referendum on the European Union reform treaty is being watched, with results expected on Friday. The rejection of the EU constitution by France and the Netherlands in 2005 was one factor behind the euro's fall that year. [ID:nL11632657]

But analysts were divided on whether the Irish vote would have much of an impact on the single currency this time.

(Reporting by Veronica Brown; Editing by Chris Pizzey)