* Euro/dollar rises, Dubai to get funds from Abu Dhabi
* Yen initially sold on position squeeze, recovers losses
* Liquidity thins ahead of year-end holiday season
By Naomi Tajitsu
LONDON, Dec 14 (Reuters) - The euro rose against the dollar on Monday after Dubai's announcement it had received help from Abu Dhabi to repay its debts bolstered risk appetite and eroded some of the U.S. currency's safe-haven appeal.
The dollar index slipped, retreating from its highest in more than a month hit last week, after Abu Dhabi agreed to bail out its debt-laden neighbour with $10 billion in aid, easing worries about a possible debt default by Dubai.
Analysts said the euro benefited from the bailout announcement, which also triggered initial selling in the yen.
But they said further gains may be capped as Dubai's debt issues underlined fiscal concerns in other countries, including Greece, whose credit rating was cut last week.
"The market's reaction to the Dubai news was relatively positive, but there remain question marks relating to the broad issue of sovereign risk, which will be one of the themes going into 2010." said Ned Rumpeltin, currency strategist at Nomura in London.
Other analysts said traders were unlikely to put on big positions as market liquidity decreases in the run-up to the year-end holidays.
By 1053 GMT, the euro <EUR=> had risen 0.2 percent to $1.4650, having climbed to around $1.4685 after Dubai said it had received funding from Abu Dhabi to help it repay $4.1 billion in an Islamic bond maturing on Monday. [ID:nGEE5AO2FN]
The euro barely moved after euro zone employment and production figures. Late last week, it hit a two-month low of $1.4586 on the EBS trading platform on the back of strong U.S. retail sales and consumer sentiment figures.
Euro/dollar gains helped to push the dollar index down 0.1 percent to 76.492, pulling it away from a near six-week high of 76.726 hit late last week.
The euro initially rose against the yen, rallying close to the day's high around 130.60 yen, before reversing those gains. It was last at 129.29 yen, down half a percent on the day.
Last month, news that government-controlled holding company Dubai World might default rattled financial markets and led to a sell-off in the euro and riskier assets, including the high-yielding Australian dollar.
FED IN FOCUS
The <JPY=> fell 0.6 percent to 88.50 yen, unable to sustain a jump to around 89 yen after Dubai's announcement. Traders cited Japanese exporters selling the greenback after its rise.
The retreat in dollar/yen helped to prompt a broad buyback in the yen, which recovered from initial selling against higher-risk currencies, including sterling and the Australian and New Zealand dollars.
Traders looked ahead to a two-day Federal Reserve policy meeting, which begins on Tuesday.
The U.S. central bank is likely to keep rates unchanged near zero, but the focus will be on the accompanying statement and whether the Fed reiterates a dovish bias and does not fully acknowledge the recent run of strong data.
The surprisingly strong reading of U.S. consumer data on Friday, coming on the heels of a lower-than-expected fall in non-farm payrolls earlier this month, had boosted the dollar.
Such signs of recovery in the U.S. economy have raised some speculation in the market that the Fed may wind down loose monetary policy sooner than markets had been expecting, although analysts said it was too soon to start tightening policy.
"We had a one-two punch of the payrolls and the retail sales data, so maybe the market is getting optimistic about a U.S. recovery," said Rumpeltin at Nomura.
"But we don't think the market should get ahead of itself and start to anticipate an early Fed rate rise."
(Editing by Nigel Stephenson)