* Dollar index dips to three-month low .DXY
* Euro breaks key technical level, up 1 percent
* Solid Chinese data, strong European earnings help risk
* Sluggish U.S. growth weighs on greenback (Adds comments, details. Changes byline)
By Vivianne Rodrigues
NEW YORK, Aug 2 (Reuters) - The dollar fell to a three-month low on Monday against a basket of currencies on fears the U.S. recovery is faltering, while the euro soared after hitting a key technical level.
Strong European earnings pushed sterling to a six-month high against the greenback, while the single currency neared $1.32 for the first time since early May.
The euro rally picked up steam after it broke above $1.3125, a key technical level. That marked the 38.2 percent retracement of a decline that began in November and took the euro to $1.1876 in June, its lowest level since 2006.
A close above that level would be a bullish sign, with $1.3510, the 50 percent retracement of the November-to-June move, a potential target, traders said. They added that barriers around $1.3200, $1.3250 and beyond could make it a slow and difficult climb.
In late afternoon trading in New York, the euro was up 1 percent at $1.3170 EUR=.
"If we close above key technical levels on the euro, we may be in for a sharp acceleration," said Sebastien Galy, senior strategist at BNP Paribas in New York. "It's a broad dollar-weakness story right now."
Signs of weaker U.S. growth have weighed on the dollar in recent weeks. The government on Friday reported that growth slowed to a 2.4 percent annual rate in the second quarter, and Federal Reserve Chairman Ben Bernanke on Monday said the economy is still far from achieving full recovery. [ID:nWAL2JE6F7]
An index of the dollar .DXY against six major currencies fell 0.7 percent to trade last at 80.92. It was nearing its 200-day moving average, another important technical level that, if breached, could suggest further losses ahead, analysts said.
Sterling hit a six-month high versus the dollar GBP=D4 of $1.5897 and hit a four-week high against the euro EURGBP=D4.
Robust results from HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz)(0005.HK: Quote, Profile, Research, Stock Buzz) and BNP Paribas (BNPP.PA: Quote, Profile, Research, Stock Buzz) helped risk sentiment and boosted European shares .FTEU3.
Some analysts said more than the increase in the profitability of European banks, some of the results showed that quarterly provisions to sustain losses had been cut in half.
"This helped ease concerns regarding the broader European banking community and has propelled the euro higher," said Dan Cook, a senior market analyst at IG Markets Inc. in Chicago.
Cook added that despite Monday's rally, the next major area of resistance may not come into play until $1.3270 and $1.3290.
RISK CURRENCIES RISE
The Australian dollar hit a three-month peak after data showed Chinese manufacturing expanded for a 17th straight month. [ID:nTOE66Q06K] It was last up 1 percent at $0.9126 AUD=D4.
The Chinese data and recent solid reports from Europe have investors hopeful the world economy can grow even if the U.S. recovery sputters, boosting the appetite for higher risk currencies and pushing them through technical levels.
U.S. stocks gained as equities investors ignored Friday's data on gross domestic product to focus on strong earnings and data that showed that growth in the U.S. manufacturing sector slowed only moderately in July. See [ID:nN02269350]
"What's happening is the rest of the world doesn't look so bad and the U.S., while sluggish, doesn't look dire yet," said Joseph Trevisani, chief analyst at FX Solutions in Saddle River, New Jersey. "As long as China doesn't fall off a cliff, the easy currency play is to keep buying risk, particularly the Australian and Canadian dollars." (Additional reporting by Steven C. Johnson and Nick Olivari in New York and Neal Armstrong in London; Editing by Leslie Adler)