* Euro pares losses though sentiment still shaky
* Aussie falls as RBA surprises by holding rates at 3.75 pct
* Analysts say Aussie may have further room to fall
* Market eyes White House adviser Volcker's testimony
(Adds quotes, updates prices)
By Neal Armstrong
LONDON, Feb 2 (Reuters) - The euro edged higher on Tuesday as Greek government bond spreads over German benchmarks narrowed, though sentiment remained shaky ahead of the European Commission's opinion due mid-week on Greece's fiscal plan.
Greek Prime Minister George Papandreou told a economic conference the level of Greek bond spreads over euro zone benchmarks was completely unjustified, keeping up the rhetoric against speculators he blames for targeting his country. [ID:nATH005160] [ID:nATH005161]
"Sentiment remains fragile despite the strong U.S. GDP data last week and the Greek situation is still in the background, making investors cautious," said Paul Robson, currency strategist at RBS.
At 1051 GMT, the euro <EUR=> had pared earlier losses to trade up 0.1 percent on the day at $1.3938. It hit a seven-month low against the dollar on Monday.
Greek 10-year yield spreads over Bunds tightened to their narrowest since Jan.27 before widening back out to 344 bps.
For a graphic on the euro/dollar exchange rate and Greek spreads, click on
Investors were also concerned about other euro zone peripheral economies, such as Portugal.
European Central Bank Governing Council member Vitor Constancio said on Tuesday Portugal needs to carry out "significant adjustments" in its economy, adding that he was relatively pessimistic about the short-term outlook. [ID:nLSB002240]
The Australian dollar remained pressured after Australia's central bank kept interest rates on hold, contrary to market expectations for a rate rise, sparking a sell-off in risk trades and a bid for lower-yielding currencies such as the yen and the U.S. dollar.
However, the RBA left the door open for further rate rises should the domestic economy continue to improve as expected. [ID:nRBA]
The Aussie steadied to trade at $0.8800 against the U.S. dollar, although it was still down 1.3 percent on the day.
Against the yen <AUDJPY=R>, it also shed around 1.4 percent, as carry trades came under pressure.
"The Australian dollar sold off as investors reconsidered their long positions versus the U.S. dollar, the yen and the New Zealand dollar in particular," said Lauren Rosborough, a currency strategist at Westpac.
"There may be more room on the downside, with the December Aussie/dollar <AUD=> low at $0.8735 now a key level to watch."
Risk sentiment will be under scrutiny later when White House adviser Paul Volcker appears before the Senate Banking Committee to defend the administration's proposal to limit risk-trading by banks, which spooked investors and triggered a sell-off in equities when it was unveiled last month.
According to testimony obtained by Reuters, Volcker will urge Congress to curb the risks taken by large banks to help prevent them from being treated as "too big to fail".
"The market will be hoping Volker doesn't sound too aggressive on the banking and financial system, as this would further undermine risk and take equity markets lower," said RBS's Robson.
The yen pared earlier gains versus the euro to trade down 0.3 percent on the day around 126.55 yen <EURJPY=R>, though the Japanese currency remained in favour against the Australian dollar, trading up roughly 1 percent at 79.90 yen.
The dollar was trading down slightly versus a basket of currencies <.DXY> at 79.20, though still close to its recent six-month highs of 79.534.
(Editing by Nigel Stephenson)