* Italian yields fall, euro zone sentiment improves * Dollar's gains vs yen may slow * U.S. data boosted risk appetite By Gertrude Chavez-Dreyfuss NEW YORK, Nov 29 (Reuters) - The euro rose for a second straight day against the dollar on Thursday, boosted by positive European news and increased expectations U.S. lawmakers will agree on a deal to avert higher taxes and spending cuts in the world's largest economy. U.S. House Speaker John Boehner, the top Republican in Congress, voiced optimism that Republicans could broker a deal with the White House to avoid the "fiscal cliff" of tax hikes and spending cuts due to kick in early next year. President Barack Obama was also optimistic an agreement will be reached before Christmas. A deal on the U.S. budget would improve the outlook on the economy, seen as positive for risk sentiment. The euro also gained as Italy's 10-year borrowing costs hit a two-year low at a sale of debt on Thursday, helped by the view that a deal this week on Greek debt has eased pressure on other highly indebted euro zone countries. In addition, surveys showed sentiment about the euro zone economy improved in November. "News flow has generally been positive, between progress towards a resolution of the U.S. fiscal cliff, falling European bond yields ... and European fundamental data turning more positive," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. In early New York trading, the euro was up 0.3 percent at $1.2993 near a one-month high of $1.3010 hit on Tuesday. Traders reported month-end demand for euros, too, but said offers above $1.30 may limit any gains. Overall though, investors were generally cautious about pushing the euro higher. Some analysts warned the euro was still vulnerable to economic data and concerns about elements of Greece's aid deal, with Athens' ability to fully implement a debt buy-back a looming issue. "Besides the possibility of Spain seeking a bailout, which would be euro-positive, there is a greater potential for downside surprises for the euro related to the euro zone economy," said Steve Barrow, head of G10 currency research at Standard Bank. Against the yen, the euro was up 0.3 percent at 106.60 yen , not too far from a seven-month high of 107.135 yen hit on Monday. U.S. data on Thursday, though slightly below expectations, pointed to an upturn in the economy, further feeding into the market's risk appetite. The euro held gains against both the dollar and yen as a result. Data showed U.S. jobless claims fell for a second straight week, while the U.S. economy grew faster than initially estimated in the third quarter. "The positive revision to economic growth in the third quarter is consistent with job creation that was almost three times faster than in the previous three months," said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey. "Despite the effects of Hurricane Sandy, the improvement should continue into year end. Good cheer for equities and risk traders." YEN LOSSES SLOW The dollar was slightly higher against the yen at 82.06 yen , pulling away from a one-week low of 81.68 hit on Wednesday. The U.S. currency has seen a corrective pull-back since hitting a 7-1/2-month high of 82.84 yen last Thursday when the yen was sold on speculation about possible aggressive monetary easing in Japan following a likely change in government next month. Main opposition leader Shinzo Abe, a front-runner to become prime minister after the Dec. 16 election, has called for radical change in monetary policy, including unlimited easing. That sparked a 4 percent fall in the yen this month. But some market players were paring back expectations of aggressive easing that would weigh on the yen, and questioned how much impact Abe will have on monetary policy. SEB analysts said in a note to clients that there was a risk of disappointment after the Japanese election. However, longer term they say the yen is vulnerable and could weaken substantially due to high debt and large deficits, although they said higher rates outside Japan may be needed "to trigger a more sustained weakness". SEB recommend buying options to buy the dollar at 82.00 yen in six months.