* Euro stalls after hitting 2-mth high vs yen
* Market questioning sustainability of European recovery
* Australian dlr slides as soft CPI dents rate expectations
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By Neal Armstrong
LONDON, July 28 (Reuters) - The euro struck a two-month high against the yen and stayed within reach of an 11-week high against the dollar on Wednesday, underpinned by robust European bank earnings and solid economic data.
But analysts said the durability of any recovery in Europe was questionable.
Risk sentiment had been boosted on Tuesday as European shares hit a five-week closing high. Two of Europe's top banks, UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz)(UBS.N: Quote, Profile, Research, Stock Buzz) and Deutsche Bank AG (DBKGn.DE: Quote, Profile, Research, Stock Buzz)(DB.N: Quote, Profile, Research, Stock Buzz), posted results that reassured investors following last week's regulatory stress tests. [ID:nLDE66Q0FS]
A rise in German consumer sentiment on Tuesday, following on from a strong Ifo and PMI surveys the previous week, had also boosted European recovery hopes.
"Clearly there's a risk-on situation as the market is starting to believe there's a European recovery in place, but there is thin liquidity behind it," said Neil Mellor, currency strategist at Bank of New York Mellon.
"We have doubts over the recovery, particularly as the U.S. economy continues to struggle," he said.
Asian equity markets closed with strong gains, as Japan's Nikkei 225 Index .N225 and China's Shanghai Stock Exchange .SSEC both jumped more than 2 percent on Wednesday, but European markets struggled to gain momentum .FTEU3.
"The market is more relaxed but it is starting to question the improvement we have seen in risk appetite over recent days. There are still potential headwinds in Europe from austerity measures, possible haircuts or even sovereign defaults," said Jane Foley, research director at Forex.com.
At 1010 GMT, the euro was trading close to flat versus the yen EURJPY=R at 114.24, easing from a two-month high hit in early European dealing at 114.74 on trading platform EBS.
Technical analysts said the picture was bullish, as euro/yen continued to make gains within its Ichimoku cloud. The top of the cloud was seen as key resistance at 117.86.
The euro stayed within touching distance of an 11-week high against the dollar EUR= of $1.3045 hit the previous day, hovering around $1.3000.
Traders said an option barrier at $1.3050 would need to be taken out for a move towards Fibonacci resistance at $1.3125, which is a 38.2 percent retracement of the December-June move.
Large option expiries were reported by traders at $1.3000 and $1.2850, potentially slowing the euro's gains on the day.
AUSSIE HURT BY CPI DATA
Key euro interbank lending rates continued to rise on Wednesday amid expectations banks would continue scaling back use of ECB loans. [ID:nLDE66R0Y2]
The ECB allotted 23 billion euros in a three-month tender operation, down from the previous month's allocation of 131.9 billion. [ID:nECB000019]
"Euribor continues to tick higher and the ECB's Trichet appears to be content for that to happen judging by recent comments," said Foley at Forex.com, referring to ECB President Jean-Claude Trichet.
The Australian dollar slid 0.7 percent to $0.8949 AUD=D4, having dropped from a 11-week high of $0.9069 reached the previous day.
Australian consumer prices rose much less than expected last quarter and core inflation slowed to its lowest in more than three years, ruling out the need for a rate rise next week and possibly the rest of the year. [ID:nSGE66P04R]
(Editing by Susan Fenton)