* Euro rises as China says Greece won't affect investments
* China to stick to policy of forex diversification - PBOC
* But analysts say euro less attractive as reserve currency
* Bargain hunting for riskier assets weighs on dollar
(Adds quote, detail, updates prices)
By Neal Armstrong
LONDON, May 27 (Reuters) - The euro rose on Thursday after Chinese officials denied a report that the country may be distancing itself from euro zone debt holdings.
A government official told Reuters that China remains committed to its long-standing goal of diversifying its foreign exchange reserves. [ID:nBJB003849]
Separately, the head of China's $300 billion sovereign wealth fund, China Investment Corp, told Xinhua news agency in an interview that the Greek debt crisis would not have a big impact on China's overseas investments. [ID:nBJB003848]
China will continue to follow a principle of diversification in investing its foreign exchange reserves, and Europe will remain one of its key investment markets, the People's Bank of China said in a statement on its website (www.pbc.gov.cn).
"The China comments downplaying the alleged change in diversification policy are reassuring on the surface and that has helped the euro rise," said Lee Hardman, currency analyst at BTM-UFJ.
"But it comes down to actions rather than words and if the European debt crisis keeps rising, there will be less attraction for China to diversify from dollars into euros," he said.
Traders said a report stating Kuwait was mulling reducing investments in the euro zone later knocked the euro off its highs. [ID:nLDE64Q0IX]
"Debt problems in the euro area make the euro less attractive as a reserve currency," said Melinda Burgess, foreign exchange strategist at RBS.
The euro, battered by Europe's debt crisis, had come under pressure after the Financial Times reported on Wednesday that China was reviewing its euro zone debt holdings because of growing concerns about gaping deficits in countries including Greece and Portugal. [ID:nSGE64P04M]
Traders were also watching for the results of a vote in the Spanish parliament over proposed austerity measures to be adopted in the country.
YEN SOLD AS EQUITIES RISE
At 0925 GMT, the euro <EUR=> was trading up around 0.8 percent on the day at $1.2270 after rising as high as $1.2342. Traders said short-covering in thin conditions ahead of market holidays in the UK and U.S. on Monday had exacerbated moves.
The euro's rise took it up from its intraday low of $1.2154 on trading platform EBS.
The euro managed to hold above last week's four-year trough of $1.2143 as well as support near $1.2135, which is roughly a 50 percent retracement of its rally from a record trough near $0.8225 to its all-time peak of $1.6040.
The euro rallied 1.5 percent against the yen to 110.85 yen <EURJPY=R>, pulling away from an 8-1/2 year low of 108.83 yen hit on trading platform EBS on Tuesday.
A sharp rise in Asian equities and a rally in European stocks fuelled selling of the low-yielding Japanese currency and buying of higher-yielders such as the Australian dollar.
"There appears to be some bargain hunting going on for riskier assets after a period of risk aversion over recent weeks," said BTM-UFJ's Hardman.
The Australian dollar <AUD=D4> rose 1.8 percent to 0.8362 and made strong gains versus the yen <AUD=D4>, rallying over 2 percent to 75.55 yen.
The dollar rose 0.5 percent against the yen to 90.30 yen <JPY=>, but was broadly weaker versus a currency basket <.DXY> as investors sold the greenback on reduced safe-haven demand.
(Editing by Jason Webb)