* Euro broadly higher, short squeeze continues
* Fears of currency intervention grow
* Australian dollar jumps but still sharply down on week (Adds comment, updates prices, changes byline)
By Wanfeng Zhou
NEW YORK, May 21 (Reuters) - The euro rose on Friday, heading for its first weekly gain versus the U.S. dollar in six weeks as investors who had bet on the currency's fall bought it back on fears of currency intervention.
The Australian dollar jumped on speculation Australia's central bank may step in to support the currency. The Aussie dollar is on track for its its biggest weekly drop since 2008, hammered by worries the euro zone debt crisis could hinder a global economic recovery.
The euro gained for a third straight session after German lawmakers approved their country's contribution to a 750 billion euro bailout package, and as European finance ministers met in Brussels to discuss changes to the way the 27-nation bloc manage public finances. [ID:nLDE64K17F].
"With the immense amount of short positions in the market and EU leaders rushing to put together a lasting remedy, the euro has certainly found its footing," said Andrew Wilkinson, senior analyst at Interactive Brokers Group in Greenwich, Connecticut.
"There has also been some market rumors that central banks would intervene, which in my mind is an unlikely event. However, the very suggestion is enough to make investors pare positions," he added.
In afternoon trading in New York, the euro traded 0.9 percent higher at $1.2575 <EUR=> <EUR=EBS>, after climbing as high as $1.2673 on electronic trading platform EBS. It is poised to end the week 1.8 percent higher against the dollar, following five weeks of losses.
The euro zone single currency tumbled to a four-year low of $1.2143 on EBS on Wednesday after Germany banned naked short selling in some securities, fueling speculation about other possible market regulations.
The Australian dollar <AUD=D4> rose 1.5 percent against the U.S. dollar to $0.8276, pulling back from its lowest level since July 2009 hit on Thursday and on track for a weekly loss of 6.6 percent. It was also up 3.3 percent against the yen <AUDJPY=R>.
"The aussie/yen is a good proxy for the risk trade and the yen has done well on the move away from risk in Europe," said David Kupersmith, head trader at Third Wave Global Investors, a global macro hedge fund in Greenwich, Connecticut. "It has nothing to do with the economic situation in Australia or Japan though there are signs Australia is slowing down."
Germany's parliament approved a bill to allow Berlin to contribute to the European rescue aid for Greece and other euro zone nations plagued by debt problems. Merkel said on Friday the vote sends a strong signal on "European stability culture." [ID:nSGE64K06K]
The euro has fallen roughly 5.5 percent against the dollar this month. Its steep decline has cranked up speculation European officials may be concerned about its level.
It also got a boost after European Central Bank President Jean-Claude Trichet said on Friday the euro was not in danger and was a credible currency. See [ID:nWLA4690]
"It's very possible that we've seen a medium-term low. We could be back at $1.30 this time next week," Interactive Brokers Group's Wilkinson said, referring to the euro/dollar.
Against the Swiss franc, the euro <EURCHF=> traded 0.5 percent higher at 1.4434, having recovered sharply from a slide to an all-time low around 1.3995 francs earlier in the week.
Concerns harsh fiscal tightening in Europe may hinder global growth have heightened fears about risk and prompted a rush to square positions across asset classes this week.
"Risk aversion has risen so rapidly that in order to protect their books, investors are just closing positions and repatriating capital," said Carl Hammer, currency strategist at SEB in Stockholm, adding: "It's a snowball effect."
The U.S. dollar rose 0.3 percent to 89.79 yen <JPY=>, while it fell 0.8 percent to C$1.0618 <CAD=>. (Additional reporting by Nick Olivari; Editing by Diane Craft)