* Euro has best day versus dollar since May 2009
* Uncertainty surrounds German naked short-selling ban
* Fed upgrades U.S. economic forecast (Adds comment, options prices, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, May 19 (Reuters) - The euro rose from a four-year low against the dollar on Wednesday to notch its best one-day gain in more than a year as traders bought the currency on speculation European monetary officials might support it.
Market talk of potential meetings or action by the European Central Bank pushed the euro higher from its lowest level since April 2006. That level -- $1.2143 -- was hit on electronic trading platform EBS before the New York session after Germany's ban on Tuesday of naked short selling of some securities.
A European Central Bank spokesman, however, declined to comment on market rumors of fresh central bank action.
"We've got this rally in the euro and I think it's the market's understanding and fear that the G7 is concerned about the speed of the euro's decline," said Dean Popplewell, chief currency strategist, at OANDA in Toronto.
"The market is worried or is anticipating some sort of verbal intervention or even a multilateral currency intervention to boost the euro."
The last time a major coordinated effort was made to intervene was in September 2000 when the Federal Reserve, Bank of England, Bank of Japan, and Bank of Canada joined forces with the ECB to support a beleaguered euro. At that time, the euro hit a trough below US$0.85.
In late afternoon new York trading, the euro was last up 1.7 percent against the dollar at $1.2391 EUR=EBS> after going as high as $1.2399, according to electronic trading platform EBS.
The euro's move to a four-year low at $1.2143 stopped ahead of key technical support at $1.2135, the 50 percent retracement of the entire bull move in the euro from all-time lows near $0.82 to the record highs just above $1.60.
Traders said option barriers at $1.22 were taken out and more were lined up at $1.21, $1.20 and right down to $1.15.
The euro hit session highs after the release of the Federal Reserve's minutes of its latest meeting. The minutes showed the Fed upgraded its outlook on the U.S. economy, boosting risk appetite in the market. For the Fed minutes, click on ID:nWEQ003931.
Given the euro zone's debt problems, the euro has become a proxy for risk appetite, rising when there's positive economic news.
The single currency is still down more than 13 percent against the dollar so far this year, hammered by concerns Europe's debt problems and austerity measures to combat them could hamper euro zone economic recovery.
EXTREME BEARISH EURO SENTIMENT
In the options market, euro/dollar one-month risk reversals EUR1MRR=GFI, a measure of currency sentiment, showed an extreme bias for puts, rising to -2.925 vols on Wednesday from -2.6125 on Tuesday, according to GFI data. Risk reversals hit a high bid of -4.175 earlier in the session, the most bearish sentiment on the euro since GFI made options data available to Reuters in early 2007.
In general, put options suggest investors are betting on a decline in the currency.
Euro/dollar one-month volatility EUR1MO=>, a gauge of the option market's expectations on a currency's trading range, surged to 16.55 from 15.25 percent on Tuesday.
The euro rose 1.8 percent against the Swiss franc at 1.4285 francs EURCHF=> after going as high as 1.4307. The euro was on track for its best gain against the Swiss currency since March 2009 as speculation swirled the Swiss National Bank intervened to counteract the franc's strength in recent sessions.
The euro was last up more than 1.0 percent against the yen at 113.40 yen EURJPY=>.
The initial German announcement of a ban on naked short sales of the stocks of some German financial institutions and some euro zone bonds sparked a wave of uncertainty which lifted the U.S. dollar and yen. ID:nSGE64I073
(Additional reporting by Nick Olivari; Editing by XXXXX)