* Euro up 0.4 at $1.2880 EUR=, off 7-wk lows vs yen
* Solid demand at Irish bond auction
* German ZEW economic index sharply below forecasts
* Trader wariness keeps yen gains limited for now
By Tamawa Desai
LONDON, Aug 17 (Reuters) - The euro extended gains against the dollar and came off 7-week lows against the yen on Tuesday after solid results from Irish bond auctions alleviated some concerns about heavily indebted euro zone countries.
But the euro struggled to hold above $1.29 on uneasiness about the economic outlook, with the German ZEW institute's closely-watched index of investor and analyst sentiment coming in far below forecasts. [ID:nDEG005695]
"The auction results were much better than the markets had expected, and there is some relief that Ireland was able to put away the bonds. So the euro is seeing a bit of a rebound," said Ian Stannard, senior currency strategist at BNP Paribas.
"But the much weaker-than-expected ZEW, which likely reflects renewed volatility in asset markets, will make it difficult for the euro to sustain gains," he added.
The euro EUR= rose to the day's high of $1.2915 after the auction results from around $1.2890 beforehand, as stop-losses were hit on the break of $1.2910.
It was last at $1.2880, up around 0.4 percent on the day, with key support was at a one-month low around $1.2732 hit on trading platform EBS on Monday, traders said.
Ireland comfortably sold its allocation of 2014 and 2020 bonds at bid-to-cover ratios of more than three times, easing concerns about funding which had been worrying investors of late. The yield on the 10-year paper fell from the last tender a month ago. [ID:nDUB003219]
YEN GAINS LIMITED FOR NOW
U.S. stock futures rose 0.6 percent by mid-morning trade in spite of underlying concerns about the global economic outlook and threat of deflation which hurt riskier assets in the previous session.
The euro rose 0.3 percent against the yen at 109.84 yen EURJPY=R after falling to 109.07 yen.
The dollar stood at 85.30 yen after sliding to 85.11 yen in Asian trade, nearing a 15-year low of 84.72 yen hit last week.
Its fall came in the wake of Monday's slide in U.S. Treasury yields, given the strong correlation between U.S.-Japanese government bond yield spreads, which have been narrowing, and the dollar/yen rate.
Selling by Japanese exporters coming back from holidays also weighed on the dollar, traders said. Japanese exporters have been hurt more by the fall in euro/yen, as they had been setting their budget targets around 120-130 yen per euro this year.
But further yen gains were capped by concerns about possible moves by Japanese policymakers to stem the yen's rise. A government source said Prime Minister Naoto Kan and the central bank governor were likely to meet next Monday. [ID:nECONJP]
When asked about the meeting, Kan told reporters: "We have been communicating with the BOJ in various ways as needed. We hope to continue communicating as necessary with the central bank." [ID:nTKB006993]
Former Japanese currency policy chief Hiroshi Watanabe said Japan may step into the currency market, possibly on its own, if the yen climbs about 3 yen versus the dollar in a day, but did not need to take action now as the yen's rise were not rapid. [ID:nTKB006992]
One-week implied volatility for dollar/yen fell to around 11.25 on Tuesday from above 12 percent last week.
Adam Cole, global head of FX strategy at RBC Capital Markets, said: "If no physical intervention or no stronger threat of intervention comes by the end of the week, then players will start to take the yen higher." (Editing by Patrick Graham)