* M&A talk in pharma sector lifts European shares
* Euro dips to 2-week low, yuan falls to 14-month lows
* Ukraine tension seen as threat to riskier assets (Updates prices, adds comments)
By Marius Zaharia
LONDON, April 22 M&A talk in the pharmaceutical sector lifted European shares on Tuesday, but failed to support the euro, which dipped to a two-week low against the dollar as ECB policymakers renewed efforts to weaken it.
British newspaper the Sunday Times said U.S. pharmaceutical giant Pfizer had approached British rival AstraZeneca to propose a 60 billion pound ($101 billion) takeover. Both companies declined comment to Reuters.
Eli Lilly and Co said on Tuesday it would buy Novartis AG's animal health business for $5.4 billion in cash to strengthen and diversify its Elanco unit.
The FTSEurofirst 300 index of top European shares was up 1 percent at 1,342.38 points, building on last week's gains on the back of largely better-than-expected results by U.S. companies. U.S. stock futures suggested a higher open in New York as well.
"There's strong corporate activity which gives some energy to the market," said Hans Peterson, global head of asset allocation at SEB Investment Management.
The stronger European stock market failed to lift the euro, which dipped to a two-week low of $1.3783, although it remained close to its strongest levels this year.
European Central Bank executive board member Benoit Coeure said on Tuesday that the strength of the euro could be keeping inflation too low and that there was further margin to reduce the main interest rate below 0.25 percent.
The comments were the latest in a series of efforts by ECB policymakers, including President Mario Draghi, to talk down the euro currency as they try to fight ultra-low inflation and keep the currency union's economic recovery on track.
Euro zone inflation is running at 0.5 percent, far below the ECB's target of just under 2 percent over the medium term, keeping speculation rife that the ECB may soon turn on the money printing presses and launch a programme of asset purchases.
Business sentiment surveys such as the euro zone PMIs and the German Ifo could alter those expectations this week. Draghi is also due to give a keynote speech in Amsterdam on Thursday.
"Euro/dollar is likely to trade with a weaker bias this week given the German IFO and Draghi's speech coming up," said Yujiro Goto, currency analyst at Nomura."
The ECB was not the only one hoping for a weaker currency.
China's yuan fell to its softest against the dollar in 14 months, after the central bank set a lower official midpoint of its trading range, highlighting its desire for a weaker currency to manage an economic slowdown.
The ECB outlook is a key factor behind this year's rally in lower-rated euro zone government bonds. Junk-rated Portugal will sell up to 750 million euros in 10-year bonds on Wednesday in its first bond auction since April 2011, pursuing a full return to market financing as the end of its EU/IMF bailout approaches.
"It is part of Portugal's long road back to becoming full market participants," said Luca Jellinek, head of European fixed income at Credit Agricole.
Portuguese 10-year yields hit their lowest in eight years at 3.66 percent last week, having fallen from crisis highs of over 15 percent in the past two years.
German Bund yields, the benchmark for euro zone borrowing costs, rose 2 basis points to 1.54 percent.
Meanwhile, investors continued to see tensions in Ukraine as a threat to riskier assets, even though they seemed to be having less of an impact on safe-haven currencies such as the Japanese yen and other markets this week.
"It's ... a risk that we need to keep an eye on," said SEB's Peterson. "For now the effect on the global GDP (gross domestic product), trade and finance seems to be quite small."
Following a gunfight that killed at least three on Sunday, Washington and Moscow each continued to put the onus on the other to ensure tensions are eased.
Washington threatened to impose additional sanctions against Russia "in days" if Russia does not implement an agreement struck last week to avert wider conflict.
The worries over Ukraine supported oil prices. U.S. crude futures stood at $104.10 per barrel, near a six-week high of $104.99 hit on Thursday. Russian shares fell. (Additional reporting by Anirban Nag, John Geddie and Sudip Kar-Gupta in London; Editing by Alison Williams)