* Euro recovers from Thursday's sell-off, trades around $1.30 * Sources say Spain making plans to meet aid conditions * Spain aid request would boost euro but gains seen limited By Jessica Mortimer LONDON, Sept 21 (Reuters) - The euro inched higher against the dollar in choppy trade on Friday, encouraged by speculation that Spain may soon request aid to recover some of the ground it lost the previous day. Market players reported very thin volumes as the euro hit a session high of $1.3048 before paring gains to last trade up 0.1 percent at $1.2980. More gains could see the euro target a four-and-a-half month peak of $1.31729 reached early this week, though traders said it was likely to struggle to reach those levels unless Spain made a decisive move towards seeking a bailout. Sources told Reuters Spain is considering freezing pensions and speeding up a rise in the retirement aid as it attempts to meet conditions of an international aid package. This helped the euro recover strongly from a low of $1.2919 reached on Thursday, when it was dented by weak euro zone business surveys that stoked concerns about a deepening recession. "If the euro closes above $1.30 this week we could see (it)... drift higher next week," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec. "There is still prevailing dollar weakness from quantitative easing in the U.S. and the euro has come out in a new range which looks like it will be more stubborn." The dollar was steady against a basket of currencies, with its index at 79.360, within sight of a six-and-a-half month low of 78.601 hit last week in the wake of aggressive monetary easing by the U.S. Federal Reserve. Support for the euro was seen at Thursday's low, which stood just above its 233-day moving average at $1.2915. "It is just a matter of time before Spain applies for financing in the coming weeks and that will be euro positive," said Carl Hammer, chief currency strategist at SEB in Stockholm. He expected the euro to rise, with a target of $1.31 or slightly higher in one month's time. But it would peak at not more than $1.34-$1.35 and Spain applying for funding would be "the last piece of euro-positive news". Sterling rose to its highest in nearly 13 months against the dollar at $1.6310, helped by UK public borrowing data that was not as bad as expected. Riskier currencies rose broadly, with the high-yielding Australian dollar climbing 0.6 percent to $1.0519. UNCERTAINTIES WEIGH The euro has been buoyed recently by a European Central Bank plan to buy the bonds of indebted euro zone countries - but it can only do that once they request aid. Spanish Prime Minister Mariano Rajoy has so far hesitated over seeking a bailout, creating uncertainty in the markets. There are also concerns surrounding Greece, with negotiators still short of a deal that would unlock the next instalment of the country's 31.5-billion-euro bailout package. The dollar was steady at 78.17 yen, well below a one-month high of 79.23 hit on Wednesday after the Bank of Japan boosted its asset-buying programme to help fuel the country's economic recovery. Morgan Stanley strategists said dollar losses should be limited by rising inflation expectations in the United States. They re-established long dollar positions at 78.80 yen with a target of 82.00 and a stop loss at 77.80. "The ability to hold above the 78.00 level would increase our confidence that a bottom is developing," they said in a note.