* Euro swings between gains and losses but ultimately lower
* Sterling tumbles after UK Q4 GDP shrinks unexpectedly
(Updates prices, adds detail, quotes)
NEW YORK, Jan 25 (Reuters) - The euro swung between gains and losses against the dollar on Tuesday but ultimately fell from a two-month high after the euro zone rescue fund's first debt offer was oversubscribed and prompted selling.
Comments from German Vice Chancellor and Foreign Minister Guido Westerwelle on Tuesday rejecting calls for an increase in the euro-zone rescue fund added to the euro's woes. Westerwelle comments to WDR radio station were reported by Dow Jones.
The British pound dived after a shock contraction in the UK economy last quarter.
"We had a junior German coalition partner saying they're not convinced that expanding the ESFS is the way to go," said Brian Dolan, chief strategist, Forex.com, Bedminster, New Jersey. "That suggests there is some dissent within the German government about extending the bailout facility, and that's taken some juice out of the euro."
Midway through the New York session, the euro was trading 0.1 percent lower at $1.3626, well short of the session high of $1.3688 on trading platform EBS though off the session low of $1.3573.
Euro volatility was partly due to the European Financial Stability Facility's (EFSF) inaugural debt issue.
The order book for the issue closed with bids valued at 43 billion euros for the 5 billion euros of paper on offer, a source at the EFSF said.
Speculation the new issue would be massively oversubscribed boosted the euro in early trade, but those gains were eroded when investors who built up euros to buy EFSF debt sold them back.
Still, the dip prompted others to move in. The euro got a bid on buying by a Middle East name and Irish and Dutch banks. That faded quickly as Westerwelle's comments circulated.
"From a chart perspective, we've tried the upside and the downside and not broken through either way," said Dolan. "If we close in a $1.3610-30 range, that will be an unchanged day and a second straight day of indecision."
"That suggests a neutral bias that can be resolved either way, but frequently, I take it as a sign of caution that the upside could be exhausted," Dolan added.
The dollar was last down 0.1 percent at 82.44 yen on EBS.
DOWN POUND
Sterling tumbled after a surprise 0.5 percent contraction in fourth quarter UK GDP due to adverse weather, compared with economists' forecasts of a 0.5 percent gain. The pound fell to a session low of around $1.5750. It last traded down 1.2 percent at $1.5803. The euro rose to its highest in three weeks against the pound.
"The UK GDP may be a warning sign of what is to come in Europe. Market participants may reassess the rate hike scenarios which had led to a short squeeze," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ in London.
Some economists said the surprisingly poor reading suggested the Bank of England would be much more cautious about the threat of lasting inflation, which would weigh down the UK currency.
Others argued the impact of persistent price pressures on a weak economy would heighten the risk of stagflation, which would also be negative for sterling.
A close below $1.5922 on sterling/dollar will be bearish, said CitiFX Technicals in a note. Current moves argue for a move to at least $1.5345, the bank said.
The Swiss franc rallied broadly, rising sharply against the euro and the pound. The euro fell 0.4 percent to around 1.2894 francs due to position adjustments. (Additional reporting by Steven C Johnson) (Reporting by Nick Olivari; Editing by Andrew Hay)