FOREX-Euro edges up on debt hopes, yield advantage

* Market gives EU leaders time to resolve debt problems

* Euro helped by yield advantage, rising lending rates

* Stellar China GDP stokes rate-tightening speculation

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By Neal Armstrong

LONDON, Jan 20 (Reuters) - The euro edged up against the dollar on Thursday on persistent demand from sovereign accounts, while investors gave euro zone officials time to make progress on finding a sustainable solution to its debt crisis.

The single currency recovered from an early slide, shaking off European share price falls, with traders saying Mideast and Asian central banks were buying around the day's low, pushing it back towards a two-month high hit the previous day.

Analysts said investors were optimistic the European Union's rescue fund (EFSF) will ultimately offer a comprehensive solution to help euro zone countries finance mounting debts.

"There's improved sentiment for the euro in that the market seems to want to give the EU time to come up with a more comprehensive deal to sort out the peripheral debt issue," said Gavin Friend, currency strategist at nabCapital.

The Financial Times Deutschland on Thursday said euro area finance ministers had discussed a plan to ease pressure on Greece by allowing it buy back its own debt using credits from the EFSF. [ID:nLDE70J0CB]

The euro <EUR=> rose 0.3 percent to $1.3520, hitting the day's high after Morgan Stanley Q4 earnings per share came in above expectations [ID:nASA01ELW]. It hovered near a two-month high hit on Wednesday of $1.3539.

"The markets remain fairly calm and are giving the euro zone authorities the benefit of the doubt for now, buying the euro on the back of its favourable yield differential relative to the dollar," said Kathleen Brooks, research director at FOREX.com.

Key euro-priced bank-to-bank lending rates rose on Thursday, as markets continued to digest last week's inflation warning from the European Central Bank, lending support to the euro. [ID:nLDE70J0UO]

Technical analysts said the single currency would be supported around $1.3435, its 100-day moving average, while upward resistance was seen at $1.3570, the 50 percent retracement of the euro's November-to-January slide.

European stock markets took a cue from selling in Asian equities, after data showing stellar economic growth in China in 2010 fuelled speculation that Beijing may come under more pressure to tighten monetary policy. [ID:nTOE70J02S]

Analysts said risk appetite was tempered investors waited to see how a visit by Chinese President Hu Jintao to the United States may affect Beijing's policy of holding down the value of the yuan. [ID:nN19294126]

Higher-yielding currencies including the Australian <AUD=D4> Zealand dollars <NZD=D4> were the day's biggest losers, falling 0.6 percent and 0.8 percent versus the dollar respectively.

The Australian dollar is particularly sensitive to the performance of the Chinese economy as Australia is a major supplier of natural resources to the country. Speculation of higher Chinese rates tends to weaken the Aussie as such action would cool growth, decreasing demand for resources.

The dollar slipped 0.1 percent versus a currency basket to 78.546 <.DXY>, hovering near a two-month low of 78.303 hit on Wednesday.

"The dollar-index is holding below pivotal support at 78.80 and that should keep it on the backfoot," said Friend at nabCapital.

Against the yen, the dollar was flat at 82.22 yen <JPY=>.

(Editing by Toby Chopra, additional reporting by Naomi Tajitsu)