* Euro rises in relief rally after Portugal auction
* Spain, Italy debt auction, ECB on Thursday
* Markets hopeful of boost to euro zone lending fund (Updates prices, adds comment)
By Wanfeng Zhou
NEW YORK, Jan 12 (Reuters) - The euro rose against the dollar for a third day on Wednesday but gains may be short-lived as a Portuguese debt sale did little to quell fears that indebted euro zone countries will struggle to meet their funding needs.
Gains in the stock and commodities market lifted investors' appetite for risk and boosted the euro, which climbed above $1.31 and broke above its 200-day moving average at $1.3094 on trading platform EBS.
Lisbon's debt auction saw healthy demand, with the average yield at the 10-year sale off, compared with a previous one in November, though 3-year bonds were sold at a significantly higher yield.
"This market has been unsustainably short of euros," said Ronald Simpson, director of currency research at Action Economics in Tampa, Florida. "There might be a little bit of a relief rally. Traders have been talking about this auction since Monday."
But analysts said the auction results would do little to change the view that the government in Lisbon will continue to struggle and may turn to the European Union and International Monetary Fund for a bailout.
"If we look at the 2014 issue, the yield was over 100 basis points higher than the last auction, which is not a good sign for Portugal's funding costs going forward. It keeps the door open (because) at some point they're going to need to formally ask for assistance," Simpson said.
Attention now turns to Spain and Italy, which will sell debt in auctions on Thursday that will also be closely watched for signs of contagion. Analysts expect the sales to go without a major hitch, but at elevated costs.
"A couple of positive bond auctions might limit euro losses, but I don't think they are going to alleviate any of the long-term concerns," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
"This is very, very early in the game. There's still a huge amount of debt that needs to be rolled over, and that's going to continue to keep investors wary," he added.
The euro last traded 1 percent higher at $1.3111, after rising as high as $1.3116 on EBS.
Analysts said further euro buying probably would not take the currency much further than $1.31, or possibly $1.3150, in the near term. Near-term support lies at about $1.2794, the 61.8 Fibonacci percent retracement of its rally from June to November.
RETESTING 4-MTH LOW
Also bolstering the euro were comments from euro zone sources that finance ministers were likely to consider raising the effective lending capacity of the currency bloc's rescue fund next week in hopes of calming jittery markets.
This follows Japan's promise to support an upcoming bond sale by the fund, the European Financial Stability Facility.
Sentiment toward the single currency will remain subdued on persistent concerns that the debt financing problems affecting Portugal and Spain may spread, with some seeing Belgium in the firing line due to political instability.
Traders still expect the euro to retest its four-month low around $1.2860 set on Monday, with a break likely opening the door to a fall toward $1.2645 and $1.2590 in the coming weeks.
The European Central Bank meets Thursday and investors will watch if the bank signals further steps to help ease pressure on peripheral bonds.
"If they continue to downplay some of the debt problems, then it suggests that officials are getting further behind the curve," Commonwealth's Esiner said. "I don't think that would be supportive."
Against the yen, the euro was up 0.8 percent at 108.81 yen. The dollar fell 0.1 percent to 83.13 yen.
The Australian dollar hit a fresh one-month low near $0.9803, before recovering. Worries about the effects from massive floods in northeast Australia hurt the Aussie.