* Euro steady, digests mixed German Ifo number
* Dollar index holds steady, struggles to gain traction
* Latest US data fails to back up last week's USD rally (Updates prices, adds comments)
By Anirban Nag
LONDON, March 25 The euro was steady on Tuesday, holding well above recent lows after a mixed German business sentiment survey, and the dollar was flat as investors awaited fresh U.S. economic data.
The German Ifo business morale index fell for the first time in five months in March, as expected, but current conditions sentiment edged higher, giving investors who had positioned for a weak set of readings an excuse to buy the euro at lower levels.
The euro was flat at $1.3840, having rallied on Monday on talk that a large sovereign investor may have bought the single currency as part of its reserve management exercise. Other traders attributed the gains to German companies repatriating profits from overseas.
"The Ifo survey was disappointing but only slightly," said Peter Kinsella, currency strategist at Commerzbank. "Business conditions remain robust, pointing to decent growth and a pick-up in wages. Typically the euro would have dropped if it was a very weak Ifo number. But it hasn't."
The dollar index was steady at 79.943, having slipped the previous day in the wake of a disappointing reading on U.S. manufacturing activity. U.S. yields also edged lower, dragging the dollar down with them.
Investors had bought the dollar last week after new Federal Reserve chair Janet Yellen suggested the possibility of raising interest rates early next year. But traders said the rally was always going to need backing up from strong U.S. economic data.
Recent data has not been convincing enough despite offering hope that the world's biggest economy was picking up momentum after a weather-induced slowdown.
Later on Tuesday, the dollar could take its cues from a batch of U.S. economic data, including readings on consumer confidence and new home sales, as well as speeches from Atlanta Fed President Dennis Lockhart and Philadelphia Fed President Charles Plosser.
Against the yen, the dollar was steady at 102.17 yen, but stayed below Monday's high of 102.65 yen.
"Activity has been pretty dull, it seems as if players haven't been making too many moves," said a trader for a European bank in Tokyo, adding that market participants were keeping a wary eye on tensions in Ukraine.
The Australian dollar rose to as high as $0.9158, its highest level since December, driven by stop-loss buying. The Aussie last fetched $0.9150, up 0.1 percent from late U.S. trade on Monday.
The Chinese yuan consolidated gains against the dollar, a day after posting its biggest rise in nearly 30 months on speculation the Chinese government would unveil stimulus measures to support the economy.
The yuan rose about 0.1 percent versus the dollar to 6.1827 , after having risen 0.6 percent on Monday. Just last week, the Chinese currency suffered its biggest weekly drop ever after the central bank stepped up efforts to shake out hot money from the market.
The wild swings in the yuan have unsettled some investors already fretting over news of a domestic bond default and slowing economic growth. (Additional reporting by Masayuki Kitano; Editing by Susan Fenton)