* Euro falls after German Ifo, euro zone PMIs slide
* Stable oil, soft equities cap dollar gains
* Sterling hit by UK retail sales fall
(Updates prices, adds quotes, changes byline)
By Jamie McGeever
LONDON, July 24 (Reuters) - The euro hit a two-week low against the dollar on Thursday after a slew of soft euro zone data underscored the increasingly gloomy economic outlook and cooled expectations of higher interest rates.
The Munich-based Ifo economic research institute said its index of German corporate sentiment dropped to 97.5 from a revised 101.2 in June. This was much weaker than expectations for a reading of 100.0 and took the index to its lowest level since September 2005 [nL24784441].
But the euro's losses were limited by gains against sterling, which suffered broadly after data showed the steepest decline in UK retail sales in May on record [ID:nL4056396].
And given the apparent bleakness of the Ifo headline data, the euro's losses weren't as heavy as they might have been. The dollar's initial advance against the euro was also halted in its tracks as weakness in European equities pointed to a lower open on Wall Street and as oil prices rebounded back above $125 a barrel CLc1.
"The euro has not exactly suffered a great deal on the Ifo. The bad (economic) news for the euro looks like it's pretty much in the price," said Peter Frank, senior currency strategist at Societe Generale in London.
"It (Ifo) doesn't look that bad although it is trending downwards. It's easy to over-dramatise ... although what is clear is there's nothing but deterioration in other (euro zone) countries."
At 1100 GMT the euro was down a slender 0.1 percent on the day at $1.5675 <EUR=>. It earlier slipped as low as $1.5637 immediately after the Ifo report, which followed data showing falls in manufacturing and service sector activity in France, Germany and the wider euro zone. [ECON]
SLUGGISH EURO ZONE
The biggest mover among the major currencies in European trading on Thursday was sterling, which fell around 0.5 percent against the euro and dollar on the 3.9 percent fall in May UK retail sales.
At 1045 GMT the pound was down at $1.9860 <GBP=>, down over a cent on the day, while the euro was up at 78.95 pence <EURGBP=>.
The euro's strength against sterling helped shield it from broader selling pressure following the Ifo and euro zone PMI data [ECON]. But this reprieve may be only temporary and could eventually force the European Central Bank to adopt a more dovish stance on interest rates.
"All in all, today's data point to an ongoing and abrupt deterioration of the growth outlook across the euro area. These levels of confidence indicator are clearly no longer consistent with the ECB's view that growth will recover gradually in the second half of the year," economists at Lehman Brothers said in a client note.
"Easing inflation pressures and negative base effects, pulling down the inflation rate from October on, should help the ECB to shift its focus from inflationary to deflationary forces towards the end of the year, paving the way for a rate cut in January 2009," they wrote.
The dollar, meanwhile, hovered near a one-month high against the yen on Thursday, rising to 107.98 yen before pulling back slightly to 107.80 yen by 1100 GMT, down slightly on the day.
The New Zealand dollar <NZD=D4> was down 0.3 percent at $0.7421, near a six-month low around $0.7404 hit earlier after the country's central bank cut interest rates for the first time in five years.
The Reserve Bank of New Zealand cut its cash rate by a quarter percentage point to 8 percent and said further reductions were likely to counter a rapidly slowing economy. [ID:nWEL287981]
Data on existing U.S. home sales are due later in the day. Some in the market said weak readings could draw attention back to the sluggish housing market, which may put the dollar back under selling pressure.