* US GDP grows 5.7 pct in Q4, fastest in 6 years
* Euro hits 6-1/2-month low versus dollar, then steadies
* Dollar index at more than 5-month high (Adds quotes, updates prices, changes byline, changes dateline, previous LONDON)
By Wanfeng Zhou
NEW YORK, Jan 29 (Reuters) - The dollar rallied against the yen on Friday after data showed the U.S. economy grew at its quickest pace in more than six years in the fourth quarter, boosting optimism about a recovery.
U.S. gross domestic product expanded at a faster-than-expected 5.7 percent pace in the quarter as businesses reduced inventories less aggressively. Analysts forecast a reading of 4.6 percent.
"Wow, it's a big headline. Net-net, it is a positive report, and we are seeing a spike up in many markets," said Boris Schlossberg, director of currency research at GFT in New York.
In early trading, the dollar rose 0.9 percent to 90.72 yen JPY=>, after increasing to 90.81, the highest level in a week, according to Reuters data.
But some analysts cautioned that growth in the quarter was boosted by government stimulus, suggesting the economy may not be as strong as the headline suggested.
The euro last traded at $1.3957, little changed on the day, after earlier falling to $1.3913, the lowest level since mid-July, according to Reuters data.
The euro steadied after hitting its lowest level since mid-July. The currency has sold off this week on concerns over the fiscal health of some of the smaller euro zone countries, such as Greece and Portugal.
EU Monetary Affairs Commissioner Joaquin Almunia said Friday that an EU bailout for Greece was not possible, sparking a widening in the premium that investors demand to hold 10-year Greek government bonds rather than benchmark German bunds.
The ICE Futures U.S. dollar index, a measure of the greenback versus a basket of six major currencies, hit a high of 79.191, the best level since mid-August.