* Dollar hits 3-week high vs euro on ECB rate cut views
* Gas spat in Europe seen pressuring euro
By Shinichi Saoshiro
TOKYO, Jan 6 (Reuters) - The dollar advanced to a three-week high against the euro on Tuesday, supported by growing expectations that the interest rate gap between the United States and the euro zone will narrow further.
Although the European Central Bank has slashed interest rates to help the euro zone economy, the euro still enjoys a comparative advantage over peers such as the dollar and the yen with euro zone rates at 2.5 percent.
In contrast, the U.S. Federal Reserve reduced interest rates last month to between zero and 0.25 percent and the Bank of Japan cut rates to 0.10 percent to combat the economic slump.
But the euro is now facing selling pressure on a growing view that the ECB will lower rates further, which would reduce the rate gap between the euro zone and other countries.
The euro declined 0.7 percent from late New York trade on Monday to $1.3543 after falling as low as $1.3503 on EBS, its lowest since mid-December.
The euro has slid below a series of chart support lines, exacerbating its retreat against the dollar, analysts said.
Against the yen, the euro dropped 1 percent to 126.06 yen.
"Several factors have exposed the euro to selling this week. One is the market beginning to price in interest rate differentials. The United States cannot lower rates any further but the euro zone can," said Toru Umemoto, chief FX strategist at Barclays Capital.
"The other factors are Russia stopping gas flows to Ukraine, which hurts the euro as it is a concern for the euro zone economy, and the ECB's Papademos mentioning a rate cut," Umemoto said.
In an escalation of a pricing row with Ukraine that saw Russia cut off gas supplies to its neighbour on New Year's Day, Russia reduced gas flows to Europe via Ukraine on Monday, a measure it said was to stop its neighbour siphoning off fuel but which Kiev said could jeopardise supplies to European countries.
ECB Vice President Lucas Papademos said on Sunday that more rate cuts may be warranted to shield the euro zone from recession.
Traders said data showing weakening inflation in Italy and Spain has increased the pressure on the ECB to cut rates.
Data on Monday showed Spain's inflation slowing to a decade low and Italy's annual inflation at a 14-month trough.
The greenback has also been buoyed by expectations that a planned U.S. stimulus package would help the faltering American economy.
The U.S. currency hit a nearly one-month high against the yen on Monday as investors cheered the plans that include up to $310 billion in tax cuts.
"There are expectations for the new administration's economic measures such as possible big tax cuts, and this may underpin the dollar in the near term," said Yuji Saito, head of the FX sales department at Societe Generale.
"But the economic package has not yet been endorsed, so investors are cautious about buying the dollar aggressively," Saito said.
The dollar slipped 0.4 percent to 93.10 yen. The U.S. currency had risen as high as 93.59 yen on trading platform EBS in U.S. trade, its highest since early December.
For near-term cues, investors are awaiting U.S. economic indicators including the Institute for Supply Management's non-manufacturing index for December and housing market data for November due later on Tuesday. The U.S. Federal Reserve will also release the minutes from its December meeting.
"The currency market may be less susceptible to weak data and the dollar may not be sold drastically even if data points to economic weakness as investors will be hopeful about the economic package until at least President-elect Obama takes office," said Okagawa, head of FX forward trading group at Sumitomo Mitsui Banking Corporation. (Additional reporting by Kaori Kaneko; Editing by Chris Gallagher)