* Euro up 2.3 pct vs dollar, off last week's 14-mth low
* Aid package, bond buying and c.bank FX swap lines help
* Unclear if package gives long-term support for euro
By Natsuko Waki
LONDON, May 10 (Reuters) - The euro rallied from last week's 14-month low against the dollar on Monday after policymakers agreed on a $1 trillion emergency package to stabilise the euro and euro zone central banks began buying local government debt.
The aid package, hammered out by European Union finance ministers, central bankers and the International Monetary Fund, was the biggest since Group of 20 leaders rolled out support measures after the collapse of Lehman Brothers in 2008.
The plan calmed investor nerves after contagion fears triggered a global rout in equities and other risky assets last week, leading to a broad rally in the euro and equities.
Central banks in Finland, Germany and France confirmed euro zone central banks have started buying government bonds [nLDE6490XA] [nWEA1259] [nPAB008345].
Uncertainty persisted however, over whether the package would give the euro lasting support since Greece and other peripheral euro zone countries must tackle fiscal deficits when their growth outlook is deteriorating.
"The package announced yesterday was supportive of euro sentiment. There is some uncertainty lingering about the mechanisms of the stabilisation funds, however. In particular, it is still unclear where the money for the funds is going to come from," said Valentin Marinov, currency strategist at Societe Generale.
"In the case of Greece, very protracted economic recovery could lead to more funding needs."
By 0945 GMT the euro was up 2.3 percent at $1.3056 <EUR=>, having fallen to $1.2510 on trading platform EBS last week. The euro was on track for making its biggest one-day gain since November 2008.
Mounting short positions on the euro prompted investors to cover their positions, helping the single currency recover.
Latest data from CFTC showed currency speculators boosted bets in favour of the dollar to a level strategists said was the highest since the euro's launch in 1999 [IMM/FX].
For a graphic on euro short positions, click on:
The single currency is still down nearly 9 percent since January, making it the worst performing major currency.
The euro rose 4.4 percent to 121.94 yen <EURJPY=> after hitting an eight-year low near 110.44 last week.
"The current euro rally should not be confused with a long-term trend change," BNP Paribas said in a note to clients.
"Currency reallocation has been an important factor driving the euro higher over the past 10 years, but going forward we expect central banks to stay sidelined as they wait to see how this monetary experiment will progress."
The dollar fell 1.7 percent against a basket of major currencies to 83.01 <.DXY>. The U.S. Federal Reserve reopened currency swap facilities with other major central banks on Sunday to ease market strains in Europe.
The Fed revived facilities established during the 2007-2008 financial crisis with the European Central Bank, and the central banks of Canada, the UK and Switzerland.
Sterling rose 1.3 percent to $1.4991 <GBP=D4>, helped by a broader recovery in risky assets, while it fell over 1 percent to 87.09 pence per euro <EURGBP=>.
Britain's opposition Conservatives and Liberal Democrats resumed talks on Monday to reach a deal to govern [ID:nLDE6480O4]. Investors are concerned a political stalemate will hamper efforts to tackle the UK's huge public deficits.
Such concerns pushed the pound to one-year lows of $1.4475 on Friday.
"The longer political leaders dilly-dally about the leadership then sterling will stay under pressure," said David Scutt, a FX trader at Arab Australia Bank in Sydney.
The Bank of England is expected to leave interest rates at 0.5 percent and not to undertake further quantitative easing purchases when it concludes its Monetary Policy Committee meeting on Monday. [ID:nLDE6461UP]
(Graphic by Scott Barber, editing by Nigel Stephenson)