* Concern over German banking sector hits euro
* Euro down 1 percent below $1.39; also falls 1 percent vs yen
* Dollar index up 0.7 percent at 80.635
* Markets await U.S. Treasury auctions, Fed buybacks
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By Tamawa Desai
LONDON, May 26 (Reuters) - The dollar rose on Tuesday, recovering from a five-month low hit last week, while investors cautiously awaited U.S. Treasury debt auctions kicking off later in the day.
The euro was hurt by plummeting share prices and weak economic data. A media report questioning the health of the German banking system also prompted traders to cash in on the euro's recent rally.
"Investors will gauge the Treasury auctions on whether there is a rising risk premium on the dollar and dollar assets," said Geoffrey Yu, currency analyst at UBS in London.
"Investors don't want exposure to weak assets right now."
The dollar index, a gauge of the greenback's performance against six other major currencies, was up 0.7 percent on the day at 80.585.
On Friday, it fell to a 2009 low of 79.805, a day after a downward revision on the outlook for Britain's AAA sovereign rating prompted speculation the U.S. government debt may lose its top-notch rating.
By 1154 GMT, the euro fell some one percent to a session low of $1.3859. It was last down 0.8 percent at $1.3877. On Friday it rose as high as $1.4051 on trading platform EBS, its highest since early January, marking a rise of some 8 percent from $1.30 in the past month.
"There is some profit taking here ... the euro/dollar rally of last week was a bit excessive," said David Powell, G10 currency strategist at Bank of America-Merrill Lynch in London.
BOOKING PROFITS
The Daily Telegraph said Germany's financial regulator BaFin had warned that toxic debt of the country's banks would blow up "like a grenade" unless they took advantage of government bad-bank plans to prepare for the next phase of crisis.
The report was not new, however, as the regulator warned last week that German banks have bad assets of around 200 billion euros ($280 billion).
Bank of America-Merrill Lynch's Powell said the story on German banks didn't contain any new information, but was enough to encourage traders to book profit from the euro's rise above $1.40 last week.
"It's certainly adding to the negative euro outlook (today)," Powell said.
Figures on Tuesday confirmed Germany's economy shrank in the first quarter at its fastest pace since reunification in 1990, while euro zone industrial new orders fell unexpectedly in March.
On Monday, German-based Ifo think tank's business climate index fell short of market expectations, suggesting that any recovery in the euro zone's biggest economy will take more time.
The euro was down 0.8 percent on the day at 131.81 yen, having hit a low of 131.49 yen.
North Korea's missile test on Tuesday, coming in the wake of its latest nuclear test, saw muted market reaction.
The dollar was up 0.2 percent against the Japanese currency at 95.00 yen.
The U.S. Treasury's auctions will total some $101 billion. The government will sell two-year notes today, five-year notes on Wednesday and seven-year paper on Thursday.
"Weak demand will spell problems for equities and forex," said Barclays Capital analysts in a note. "Both the cover ratio and the level of non-commercial participation will matter in addition to the yield."
Traders will also keep an eye on the Fed's buying of inflation protected securities on Tuesday and conventional Treasury debt on Wednesday. (Additional reporting by Jamie McGeever; editing by Stephen Nisbet and Andy Bruce)