FOREX-Euro edges up as debt deal boosts risk appetite

* Euro edges up 0.3 pct versus dollar to $1.2675

* Analysts say debt contagion risks stemmed for now

* Strong Australian jobs data buoys Aussie

(Adds quotes, updates prices, previous TOKYO)

By Neal Armstrong

LONDON, May 13 (Reuters) - The euro edged up on Thursday, aided by an improvement in risk appetite which boosted higher-yielding currencies and as contagion risks from euro zone debt problems diminished.

A $1 trillion rescue deal hammered out at the weekend by global policymakers has eased investor worries a Greek sovereign debt crisis will spread.

However, concerns about the ability of fiscally weaker states to make necessary budget cuts and about the impact on growth continue to weigh on the euro.

Passage of the rescue deal has boosted risk appetite this week and data on Thursday showing Australian unemployment surged in April added to this. [ID: nSGE64C03O]

Asian equity markets rose, with the Nikkei <.N225> holding gains of around 2 percent, following on from robust performances in U.S. stocks on Wednesday.<.SPX>

"For now the contagion risks in the euro zone have been partly stemmed which has helped the riskier currencies and provided a floor for the euro," said Jeremy Stretch, currency analyst at Rabobank.

"But there are question marks over the austerity measures required in the southern European states and that makes the euro vulnerable," he said.

At 0728 GMT, the euro was trading with gains of around 0.3 percent on the day versus the dollar at $1.2675, but remained in sight of its recent 14-month low near $1.25. Traders reported strong option-related demand around $1.25.

The euro rallied 0.7 percent versus the yen to 118.60 yen, having fallen to an eight-year low of 110.49 yen on trading platform EBS last week.

In the week to May 8, Japanese investors dumped a net 1.57 trillion ($16.8 billion) yen of overseas bonds, the heaviest net selling since 2.11 trillion from the week to April 4 last year, data from Japan's finance ministry showed. [JP/CAP]

Traders said this illustrated the growing risk aversion which fuelled a rout in global stocks last week.

The dollar was up around 0.4 percent against the yen at 93.55 yen.

The Australian dollar rallied close to 1 percent on the day to trade back above $0.90 versus the U.S. dollar .

But analysts said interest rate rises from the Reserve Bank of Australia may be limited by external factors, potentially capping further Aussie gains.

"Despite the RBA's increasing concerns over the inflation outlook and a tightening in the labour market, we think global factors dominate and expect the RBA to stay on the sidelines for the next couple of months," said Su-Lin Ong, senior economist at RBC Capital.

Sterling climbed 0.6 percent versus the dollar to $1.4912, trimming losses made the previous day when a dovish inflation outlook from the Bank of England knocked the currency down around 0.7 percent.

(Additional reporting by Kaori Kaneko, Editing by Nigel Stephenson)