* Fed begins two-day meeting; statement due on Wednesday
* Euro hits 2-1/2-mth low vs dollar on bank, fiscal worry
* German investor sentiment decline prompts euro selling
* U.S. PPI data above forecast, NY manufacturing slumps
* Year-end short covering boosts dollar broadly
(Recasts, updates prices)
NEW YORK, Dec 15 (Reuters) - The dollar climbed broadly on Tuesday, touching a 2-1/2-month peak against the euro, as stronger U.S. inflation data suggested the Federal Reserve could at least contemplate raising interest rates sooner than investors anticipate.
The dollar was also bolstered against the euro on euro zone bank concerns and data suggesting growth in the region using the single currency remained weak.
The Fed, which ends a two-day policy meeting on Wednesday, has said rates are likely to remain very low for an extended period. Any hints to the contrary would increase the dollar's appeal by raising the return on dollar-denominated assets.
Data on Tuesday showed U.S. producer prices rose 1.8 percent last month, the largest gain in three months. That pushed up U.S. bond yields and came on the heels of stronger U.S. employment and consumer spending data. For more see [ID:nN15217719].
"We've had a string of very good U.S. data releases compared to Europe, and today's data suggests inflation is picking up again, so the whisper out there is that the Fed will hike rates sooner than expected," said Michael Woolfolk, currency strategist at BNY Mellon in New York.
Economists polled by Reuters expect data on Wednesday to show U.S. consumer prices rose 0.4 percent overall in November.
The euro fell to $1.4504 <EUR=>, according to Reuters data, its lowest since early October. It last traded down 0.8 percent at $1.4535.
The dollar's gains were blunted after comments from Federal Reserve Chairman Ben Bernanke in response to questions from Senator Jim Bunning of Kentucky were made public on Tuesday.
Bernanke said the U.S. economy currently has a high degree of slack, which should help keep inflation contained, though he also said it will "eventually become appropriate" to raise rates as the economy recovers. [ID:nWBT013415].
EUROLAND BANK, FISCAL WORRIES
A closely-watched survey that showed German investor sentiment soured in December hurt the euro, as it suggested a sluggish recovery for the euro zone's top economy. [ID:nDEG005610]
A greater weight on the euro was a report saying Austrian monetary authorities had put the country's fourth-largest bank on a watchlist. [ID:nSGE5BE09B].
Austria's central bank, however, said on Tuesday that Oesterreichische Volksbanken <OTVVp.VI> stayed above legal capital requirements in a severe stress test and was not comparable to bailed-out bank Hypo Group Alpe Adria. [ID:nVIE003475].
But the newspaper report compounded ongoing worries about the weak fiscal positions of some euro zone countries. After its credit rating was cut last week, Greece announced spending cuts Monday aimed at reining in its debt. [ID:nSGE5BE09B] and [ID:nLDE5BD2DA]
"Problems in Greece continue, and the news about the Austrian bank hasn't helped either," said Ian Stannard, currency strategist at BNP Paribas in London.
Against the Japanese yen the dollar gained 1.2 percent to 89.61 yen <JPY=>. It rose 0.8 percent to 1.0402 Swiss francs <CHF=>, while sterling fell 0.2 percent to $1.6273 <GBP=>.
The Fed's ultra-low interest rate policy has kept the dollar under pressure for most of 2009. Though it hit a 2-1/2-month high against a basket of major currencies on Tuesday <.DXY>, the dollar has lost some 5 percent in 2009 on that calculated measure.
Some other central banks have started raising rates. The Reserve Bank of Australia has led the way in the developed world with three consecutive rate hikes, bringing borrowing costs to 3.75 percent.
But on Tuesday, RBA minutes from its last policy meeting pushed the Australian dollar down 1.2 percent to $0.9059 <AUD=>. Analysts said the minutes suggested the Australian central bank's rapid increase in rates may give it the flexibility to pause in the tightening cycle.
The Fed has tougher choices, analysts said.
A reminder came from a report showing New York state manufacturing fell unexpectedly this month. [ID:nNYS007618]
"Unfortunately the sharp drop in the survey will make it difficult for the Fed to be anything more than cautiously optimistic," said Kathy Lien, director of research at GFT Forex in New York. For a graphic encompassing stocks, dollar, gold, and oil, illustrating an extension of the breakdown in the correlation between markets, click link.reuters.com/tyg96g (Reporting by Nick Olivari and Steven C. Johnson; Additional reporting by Naomi Tajitsu in London; Editing by Padraic Cassidy)