* Euro slips to 6 1/2-month low on sovereign debt worries
* Greece, Portugal fiscal concerns mount
* Dollar pares gains vs yen after weaker U.S. data (Adds details, comments, updates prices)
By Wanfeng Zhou
NEW YORK, Jan 28 (Reuters) - The dollar rose on Thursday to its highest level in more than six months against the euro, which fell on persistent concerns over the fiscal health in some smaller euro zone countries such as Greece and Portugal.
The premium investors demand to hold Greek government bonds rather than benchmark German Bunds set a new euro lifetime high on Thursday. The cost of insuring its sovereign debt against default also hit a record high.
Germany and France denied a newspaper article suggesting an EU bailout for Greece was being planned, while Athens said it has struck no deal for China to buy its bonds and will search mainly in Europe for funds.
Adding to pressure on the euro were warnings from credit ratings agencies that Portugal's needs to come up with a clear plan of further budget consolidation beyond 2010 to prevent downgrades after this year's budget plan failed to alleviate concerns.
"Clearly that concern is not going away and if anything, it's becoming a greater concern for the market," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. "It seems that the market is willing to push euro/dollar even lower."
In morning trading, the euro fell 0.5 percent lower at $1.3955. Earlier, it fell as low as $1.3938, its weakest since mid-July, according to Reuters data.
Traders were watching for a weekly close under $1.3980 to open up fresh downside potential.
Against the yen, the dollar rose 0.1 percent to 90.05 yen.The euro dropped 0.4 percent to 125.67 yen, not far from Wednesday's nine-month low of 125.17 yen.
The greenback earlier pared its gains versus the yen after U.S. data showed initial jobless claims fell less than expected last week, while durable goods orders increased less than expected in December.
Both reports dented optimism about a U.S. economic recovery and spurred investors to shy away from riskier investments funded by cheap borrowing in the Japanese currency.
"The market is a little disappointed in the lack of improvement in labor market conditions," said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington.
HIGH-YIELDERS
The dollar also gained after the Federal Reserve left interest rates steady near zero on Wednesday, but Kansas City Fed President Thomas Hoenig dissented and wanted the central bank to eliminate a phrase vowing to keep rates exceptionally low for "an extended period."
This bolstered the view that rates may start to rise later this year, which would boost the value of dollar-denominated assets.
"It's indicating that at some point in the future, the FOMC will have to look at dropping or at least tweaking the key statement, i.e. low rates for an extended period," RBC's Strauss said.
The dollar was up 0.4 against a currency basket after hitting a 5 1/2-month high of 79.066. It held above its 200-day moving average at 78.32 following its decisive break above that level on Tuesday.
The high-yielding Australian and New Zealand dollars rose after U.S. President Barack Obama announced no new measures to punish the financial sector, sparking recovery in risk appetite.
The Australian dollar was up 0.3 percent at US$0.8976 and the New Zealand dollar gained 0.2 percent to US$0.7074.
Investors also awaited a U.S. Senate vote on U.S. Federal Reserve Chairman Ben Bernanke's nomination for a second term. Polls show that a majority now looks likely.
(Additional reporting by Nick Olivari and Neal Armstrong in London) (Editing by Theodore d'Afflisio)