FOREX-Euro pares gains on concerns over econ, finances

* Euro pares gains on concerns over euro zone econ, finances

* Ireland denies seeking IMF help; says need to cut deficit

* Trade subdued ahead of ECB rate decision on Thursday

* Market watching U.S. Dec retail sales

(Adds comments, updates prices)

By Tamawa Desai

LONDON, Jan 14 (Reuters) - The euro pared earlier gains on Wednesday as concerns mounted over the euro zone economy and the state of its public finances, overriding earlier cautious optimism that had prompted investors to buy the currency.

Data on Wednesday showed Germany's economy grew at its slowest pace in three years in 2008. More pointedly, data showed the euro zone's biggest economy had contracted by between 1.5 percent and 2.0 percent in the final three months of the year, the largest fall since German reunification in 1990.

Sentiment over the euro was hurt further on reports Irish Prime Minister Brian Cowen said IMF help may be needed if its economic downturn worsens, although those comments were later denied. [ID:nLE684175]

But Cowen told Irish broadcaster RTE in an interview he endorsed the view of the country's unions that public finances are unsustainable [ID:nDUB000777].

"Even with the denial, I think the markets are likely to conclude that there's no smoke without fire," said Derek Halpenny, European head of global currency research at BTM UFJ in London.

"It's a well known fact that of any country within the euro zone Ireland has the most fragile banking sector because of the degree of leverage in the property market."

Markets were already jittery after Spain and Portugal this week became the third and fourth euro zone countries since last week to be warned by ratings agency Standard & Poor's that their credit rating is under threat from the global financial crisis. [ID:nLC477283]

By 1030 GMT, the euro was up 0.3 percent at $1.3232, off from a session high of $1.3335 EUR=. But that was still above a one-month low of $1.3140 on trading platform EBS the previous day.

Further data on Wednesday showed euro zone industrial production fell for the seventh straight month in November, although by a smaller-than-expected 1.6 percent [ID:nLE557833]

"The euro zone is going to face its sternest test in 10 years," said Chris Turner, chief currency strategist

"We are seeing some independent euro weakness, given the severity of the slowdown and concerns about finances given recent news on credit ratings."

The euro had risen in early European hours as extreme risk aversion receded and European shares opened higher after a rebound in Asia and as Wall Street pared most intraday losses.

That was a sharp reversal from the previous day, where the euro and other higher-yielding currencies were hit as investors sought perceived safer currencies such as the dollar and yen.

"It's still about equity markets," said Christian Lawrence, currency strategist at RBC Capital Markets, adding that 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]

After opening higher, European shares were down by more than one percent by mid-morning trade .FTEU3

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 0.1 percent against the yen at 89.29 yen JPY=.

Investors are watching U.S. December retail sales, which will reflect the critical Christmas shopping season. Retail sales, due out at 1330 GMT, are expected to fall 1.2 percent to mark a sixth straight monthly drop after a 1.8 percent decline in the previous month.