* China should increase EUR, JPY holdings - Chinese report
* Euro hits 14-mth high vs dlr on report
* Pound sell-off intensifies on economic gloom
(Updates prices; changes byline, dateline; previous TOKYO)
By Jessica Mortimer
LONDON, Oct 26 (Reuters) - The dollar fell to a 14-month low against the euro on Monday after a Chinese report saying Beijing should increase its holdings of euros and yen in its foreign reserves gave fuel for investors to sell the greenback further.
The dollar was also lower against the yen and the higher yielding Australian dollar, though analysts said losses may be capped by concerns the U.S. currency has limited scope for further falls.
Sentiment towards the euro was also knocked slightly by a survey which unexpectedly revealed German consumer sentiment declined for the first time in just over a year going into November.
"The China story has been the key story and we have moved up quite firmly in euro/dollar," said Michael Klawitter, senior currency strategist at Commerzbank in Frankfurt.
"But the issue of reserve diversification has been an ongoing topic for quite a while, while the other reason the dollar is not selling off more sharply is that the market is already very short dollars and there is only a certain extent that people want to be short," he added.
Data on Friday showed currency speculators increased bets against the U.S. dollar, with the value of the dollar's net short position rising to $18.65 billion in the week ending Oct 20 from a $17.99 billion net short the prior week.
At 0835 GMT, the euro was up 0.2 percent at $1.5035, having earlier risen as high as $1.5064 on trading platform EBS, its highest since August 2008.
The euro's gains were also helped by European Central Bank Governing Council member Christian Noyer making no comment on euro/dollar, which speculators took as an excuse to push the single currency higher.
The story out of China was an opinion piece in the Financial News, a paper published by the People's Bank of China, which said the dollar should remain the principal currency in China's foreign exchange reserves but that the share of euros and yen should increase.
But the European single currency had trimmed some gains after the Chinese researcher who wrote the opinion piece said he was expressing purely personal views.
The dollar index, a gauge of the greenback's performance against six other major currencies, was down 0.2 percent at 75.321, moving back towards a 14-month low of 74.940 touched last week.
Against the yen, the dollar fell 0.3 percent to 91.81 yen, retreating from a one-month high of 92.23 yen hit on EBS earlier in the day.
The Australian dollar also firmed, gaining a boost from the China story as many investors believe the Australian currency has been included in the currencies that China and other central banks have bought to diversify foreign reserves.
"This is quite good for the Aussie as those diversifying into the euro are also buying the Australian dollar," said Tony Bieber, forex analyst at Suncorp in Tokyo.
The Australian dollar rose 0.2 percent against its U.S. counterpart to $0.9244, rebounding towards a 14-month high of $0.9330 reached last week.
Elsewhere, sterling remained under pressure, falling 0.2 percent to $1.6264.
The pound extended steep losses on Friday following data showing the UK economy contracted in the third quarter, disappointing investors who had been paring short positions as they bet on an early return to growth. (Additional reporting by Satomi Noguchi in Tokyo)