FOREX-Euro rebounds as risk aversion recedes but capped

* Euro rebounds from 1-month low vs dollar but limited

* Extreme risk aversion eases as share prices recover

* Sterling, Aussie dollar also rise sharply

* Eyes on EZ industrial output, U.S. Dec retail sales

By Tamawa Desai

LONDON, Jan 14 (Reuters) - The euro clawed back from one-month lows against the dollar on Wednesday on short-covering as equity prices recovered, but the upside was capped before the European Central Bank's policy-setting meeting later this week.

A rebound in Asian share prices after Wall Street pared most intraday losses prompted investors to buy back the euro after sharp selling in equities spurred them to shun riskier assets the previous day and seek perceived safer currencies such as the dollar and yen.

"There's been a bit of a squeeze and it's a reversal from what we saw yesterday with a slight emergence of risk appetite," said Christian Lawrence, currency strategist at RBC Capital Markets.

"It's still about equity markets," he added, saying moves will likely be subdued ahead of the ECB's decision on Thursday.

The ECB is widely expected to cut rates by 50 basis points from the current 2.5 percent to help fight a broad economic downturn. [ECB/INT]

At 0834 GMT, the euro was up 0.7 percent on the day at $1.3291 after hitting a session high of $1.3335 EUR=. It had fallen to a one-month low of $1.3140 on trading platform EBS the previous day.

Against the yen, the single currency rose 1.4 percent to 119.29 yen EURJPY=R. It had hit a low of 117.13 yen on EBS on Tuesday, the lowest since early December.

European shares opened higher .FTEU3 after Tokyo's Nikkei share average .N225 rose 0.3 percent after a sharp sell-off the previous day. [.T]

Data on Wednesday showed German 2008 GDP rose 1.3 percent from the previous year, in line with market forecasts for a 1.4 percent gain. [nBAE001547]

Traders will keep an eye on euro zone industrial production data due out at 1000 GMT, which is expected to show a 1.5 percent decline in November from the previous month.

The European single currency's gains against the dollar were also limited after Spain became the third euro zone country since last week to be warned by ratings agency Standard & Poor's that its credit rating is under threat from the global credit crisis. [ID:nLC477283]

"The surrounding environment for the euro is weak and there are no reasons to favour the currency," said Nobuaki Kubo, vice president at BBH Investment Services.

Meanwhile, sterling got a boost, hitting a session high of $1.4708 GBP=, after the British government launched a scheme to help cash-strapped small firms. [ID:nLE203734]

The Australian dollar also rebounded from one-month lows hit on Tuesday, rising more than two percent to $0.6769 AUD=.

The dollar was up 0.6 percent against the yen at 89.73 yen JPY=.

Investors are watching U.S. retail sales data due out at 1330 GMT.

U.S. December retail sales, which will reflect the critical Christmas shopping season, are expected to fall 1.2 percent to mark a sixth straight monthly drop after a 1.8 percent decline in the previous month, according to a Reuters poll. (Additional reporting by Kaori Kaneko in Tokyo; editing by Chris Pizzey)