* Dollar index near 6-week peak as US debt concerns weigh * Little reaction to jump in yields at Spanish auction * Euro boosted by short covering, downside risks seen By Nia Williams LONDON, Nov 22 (Reuters) - The dollar hovered near a six-week high against a basket of currencies on Tuesday as worries that politicians on both sides of the Atlantic were failing to tackle huge debt burdens weighed on investor appetite for risk. Percieved riskier currencies regained some ground after coming under pressure during the previous session, but dollar funding strains continued to support the U.S. currency as European banks scrambled to secure cash dollars. Signs the dollar money market was seizing up added to investor concerns the spiralling euro zone debt crisis could pummel European banks. The dollar index was last trading down 0.2 percent on the day at 78.147, within reach of Monday's peak of 78.516 which was the highest level since Oct. 10. Investors had reached for the safety of the world's most liquid currency after a "super committee" of U.S. lawmakers failed to agree on a deficit cutting plan. The euro was up 0.3 percent on the day at $1.3535, with short covering helping the single currency climb off session lows around $1.3469. Traders cited stop-loss orders around $1.3575-85. "We have recovered a bit off the lows but the risk environment is going to be still very challenging. The big events in the U.S. and Europe are still coming out as negative and providing a bearish backdrop for investors," said Ian Stannard, head of European FX strategy at Morgan Stanley. "Any rebounds in the euro are going to be fairly short-lived. Dollar funding concerns are still a very big factor and are keeping risk appetite quite constrained." A jump in Spanish bond yields to their highest in 14 years at a short-term bill issue on Tuesday highlighted market concerns about the euro zone's ability to overcome its debt crisis although the jump was not unexpected and the euro showed little immediate reaction. Stannard said apart from a brief spike higher on Friday the euro's upside had been capped around the $1.3550 level over the past week and he expected the euro to retreat if it failed to break above that level on Tuesday. Stress in the dollar money market showed no sign of abating after the three-month euro/dollar swap spread rose to 140 basis points on Monday, the highest level since late 2008. It was last around 138 basis points. EYE OF THE STORM Market players said speculation that the already huge bets made against the euro could lead to further bouts of short covering had helped support the single currency above a six-week low of $1.3421 hit last week. Data from the Commodity Futures Trading Commission last Friday showed that net euro short positions rose to 76,147 contracts in the week through Nov. 15, from 54,257 a week earlier. Talk of continuing repatriation of foreign assets by European players has also helped put a floor under the single currency and discouraged short sellers. Still, the common currency could be under renewed pressure soon unless policymakers come up with drastic measures to tackle the euro zone debt crisis and stop investors dumping euro zone government bonds. "There are so many different issues to be solved at the moment. The European Commission is trying to cut to the chase on euro zone bonds but it's almost a waste of time given Germany is showing no signs of capitulating on that front," said Neil Mellor, currency strategist at Bank of New York Mellon. "It is unclear what is going to take us through this crisis and where we will stand in six months' time. Given the lack of answers to these questions it's remarkable how resilient the euro has been." The European Commission has set out in a paper to be published on Wednesday how closer monitoring of countries' budgets could in the long run make it possible to issue jointly underwritten euro zone debt. The dollar was steady against the yen at 76.88, retreating from a session high of 77.35 after some traders took comments by Finance Minister Jun Azumi as hinting at more intervention by Japan. He in fact merely stated that huge buying of foreign bonds by the Bank of Japan would not be in line with government thinking. The Australian dollar pared heavy losses incurred on Monday. It was up 0.1 percent on the day at $0.9862 but was still below a support-turned-resistance level of around $0.9910, a 61.8 percent retracement of its October rally.