* Dlr/yen little changed at 85.65 yen JPY=
* But investors nervous of more yen selling
* Euro hits 1-month high vs dollar, yen after Spain auction
(Adds comment, updates prices)
By Neal Armstrong
LONDON, Sept 16 (Reuters) - The yen steadied against the dollar on Thursday as Japanese authorities backed away from the currency market after their massive yen-selling operation the previous day, but wariness of fresh selling remained.
The euro hit its highest in more than a month against the dollar and the yen after strong demand at a Spanish bond auction prompted some buying in the single currency, triggering stop-loss buy orders which accelerated its move higher.
Speculation Tokyo may step back in to sell the yen capped its upside after Japan sold an estimated 1.8 trillion yen ($21.14 billion) for dollars to stem yen strength on Wednesday.
Japan's first currency intervention in six years knocked the yen from a 15-year high versus the dollar and analysts said the move showed Japan was firmly resolved to stem yen strength.
"It's too early to take on Japanese authorities. They have unlimited fire power and the dollar is under quite a lot of stress at the moment," said David Bloom, head of global currency strategy at HSBC.
"I'd expect the dollar/yen to move higher at least in the short term." By 1123 GMT, the dollar JPY= was down 0.1 percent at 85.64 yen, but well up on 82.87 yen hit on Wednesday. Investors said a fall under 85.00 may prompt Japan to re-enter the market.
Analysts said wariness of more intervention may limit the dollar's downside to 83 yen -- close to where Japan was seen beginning its yen selling on Wednesday.
Prime Minister Naoto Kan reiterated on Thursday Japan would take decisive steps on yen rises, Jiji news agency reported, while Bank of Japan Governor Masaaki Shirakawa said he expected intervention would stabilise the forex market. [ID:nTKF107009]
Investors awaited comments from U.S. Treasury Secretary Timothy Geithner later in the day for any hints of Washington's reaction to the yen selling as the market waits to see how the intervention is received by Group of Seven countries.
Analysts said speculators spooked by Wednesday's action would likely be prompted to cut their long yen positions, which could help the dollar climb to 86 yen in the near term.
Others in the market said the yen's claw back, while slight, reflected the difficulty of stopping yen appreciation, given narrow yield spreads between Japanese and U.S. government bonds. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For dollar/yen correlations link.reuters.com/wyn43p For PDF on the yen's rise r.reuters.com/zuz33p For graphic on intervention link.reuters.com/wym42p For Insider on yen link.reuters.com/rak63p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Market participants said dollar selling by some Japanese exporters pushed the U.S. currency off Wednesday's high of 85.78 yen hit on electronic trading platform EBS.
Concerns the yen's rise will hurt the economy by squeezing exporters' profits were seen to be behind Japan's move. Traders have said exporters want to sell the dollar above 85 yen before their half-year book-closings at the end of September.
Technical analysts say the dollar's upside may be capped around 85.83 yen, where a trendline from the dollar's highs in May and June falls, and 85.95 yen, the 55-day moving average.
The euro EUR= was up 0.6 percent at $1.3083 after rising to $1.3109 according to Reuters data, its highest since Aug. 11, after auctions of 10- and 30-year Spanish government bonds produced lower average yields than at a previous sale in June. [ID:nLDE68F0QX]
"The Spanish bond auction went very well and that's removed some of the debt risks attached to the euro," said Chris Turner, head of fx strategy at ING.
Traders in London said the euro's initial rise after the results took out stop-loss orders placed around $1.3047, the 61.8 percent retracement of its sell-off in August.
It rose as high as 112.32 yen EURJPY=R, also its highest in about a month and adding to gains after dollar/yen intervention drove it up roughly 3 percent on Wednesday.
The Swiss franc slipped against a broadly rising euro before a Swiss National Bank policy decision. The SNB is widely expected to hold interest rates at low levels due to a bleaker economic outlook. [ID:nLDE68F09U]
(Additional reporting by Naomi Tajitsu, editing by Nigel Stephenson)