* Trichet move raises speculation of a rescue for Greece
* Investors eye EU economic summit on Thursday
* Some short euro positions squeezed out
(Adds quotes, detail; previous TOKYO)
By Neal Armstrong
LONDON, Feb 9 (Reuters) - The euro extended its recovery from its recent 8 1/2-month low against the dollar on Tuesday, on market speculation that a bailout would be organised for Greece soon, prompting a squeeze of vulnerable short positions.
The speculation emerged after news that European Central Bank President Jean-Claude Trichet was leaving a meeting of central bankers in Sydney early to attend a European Council meeting on Feb. 11.
"We are seeing a squeeze of some short euro positions which were established at low levels as market speculation of a Greek bailout is seen as positive in the near-term," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.
At 0850 GMT the euro had risen 0.5 percent on the day to trade at $1.3725, just off the day's high of $1.3744.
However, gains were capped as investors remained wary of pushing the euro too high as concerns about the fiscal positions of euro zone states including Greece, Portugal and Spain hampered sentiment towards the single European currency.
For a graphic on the euro and Greek bond spreads, click
http://graphics.thomsonreuters.com/0210/EZ_EURGR0210.gif
Praefke at Commerzbank added that near-term resistance was at $1.3750 in euro/dollar, with a break above that level needed to give the recovery more substance.
European leaders will hold a pre-arranged special summit in Brussels on the euro zone economy on Thursday, with investors waiting to see what will emerge as Greece struggles with a debt crisis and some of its other economies face budgetary concerns. Latest CFTC positioning data showed a record build-up of short euro positions, leaving the currency susceptible to a squeeze on any perceived good news.
The euro was also holding a firmer tone versus the yen with gains of around 1 percent at 123.26 yen. It fell to its lowest levels in nearly a year on Friday as sentiment surrounding the euro zone currency deteriorated further but picked up some of the lost ground on Monday.
The market reported topside stops at 123.30/50, though one London-based trader suggested that area was in fact a selling opportunity.
"For me nothing has changed, risk-off trades will win through but this 24 hours of consolidation followed by a squeeze is just a small mine field we have to cross. Patience is called for but hopefully this will bring us close to decent selling levels," he said.
The dollar was holding a softer tone versus a basket of currencies, trading down 0.2 percent at 80.132 amid a slight uptick in risk appetite.
Overall, the greenback remained close to Friday's high of 80.863, a level not seen since July 2009. The dollar remained supported due to its safe-haven appeal as uncertainty over euro zone states' fiscal health kept investors risk-averse.
BERNANKE
Later this week, markets will watch congressional testimony on Wednesday by Federal Reserve Chairman Ben Bernanke.
Bernanke will speak about unwinding of emergency Fed liquidity programmes and implications for the economic recovery.
The dollar was trading with slight gains versus the yen, up 0.3 percent at 89.55.
The yen also pared recent gains versus higher-yielding currencies such as the Australian dollar, though technical traders said the outlook for this pair remained negative while under the 200-day moving average at 79.34.
Traders said market players were wary that China may take a further tightening step before a week-long holiday next week.
(Additional reporting by Satomi Noguchi; editing by Nigel Stephenson)