* Dollar dips vs euro in thin trade, dollar index down
* Investors await U.S. GDP, housing data
* U.S. firms forced to reduce costs; GM, Ford ratings cut
(Adds comment, updates throughout)
By Naomi Tajitsu
LONDON, Dec 23 (Reuters) - The dollar edged lower against the euro and a basket of currencies in thin trade on Tuesday as worries about the depth of the U.S. recession mounted ahead of major U.S. economic data due later in the day.
U.S. existing and new home sales figures are forecast to show a further deterioration in the housing market, while the Reuters/University of Michigan survey is expected to show consumer sentiment remains weak.
Meanwhile, gross domestic product data is seen confirming previous estimates of a 0.5 percent contraction in the third quarter, which would mark the sharpest fall since the third quarter of 2001.
Such weak data readings would add to the view that the U.S. economy is mired in a deep recession, which could push the dollar lower. Analysts said that razor-thin liquidity during the year-end holiday season could aggravate market movements, putting even more selling pressure on the U.S. currency.
"The possibility of bad economic news is having an effect on the dollar," said Chris Gothard, currency analyst at Brown Brothers Harriman in London.
"There's some concerns that the reports coming out this afternoon could show further declines in consumer confidence and the housing market."
Adding to the dim view of the U.S. economy was news that big U.S. manufacturers were slashing costs, while ratings agencies dropped their ratings on debt held by U.S. automakers which have just received a lifeline from the U.S. government.
By 1146 GMT, the euro traded 0.4 percent higher against the dollar at $1.3995. The pair climbed to as high as $1.4720 on electronic trading platform EBS last week, its strongest level since late September.
The dollar index -- a gauge of the U.S. currency's performance against six major currencies -- slipped a third of a percent to 80.962.
Gains against the dollar helped to prod the euro 0.3 percent higher to 126.05 yen.
The dollar slipped a touch against the yen to 90.00 yen, and hovered near a 13-year low of 87.13 yen struck last week on EBS.
U.S. DATA EYED
The dollar stayed on the back foot after several U.S. manufacturers joined the list of firms slashing costs, with Caterpillar Inc cutting white-collar pay by up to 50 percent and Textron Inc announcing 2,200 job cuts worldwide.
Concerns over the prospects for U.S. automakers also mounted as ratings agency Standard & Poor's cut its unsecured debt rating on General Motors to 'C' and Moody's lowered ratings on Ford to 'Caa3'.
"We have had a litany of bad news on the U.S. economy over the past 24 hours and this continued negative news will weigh on the dollar," Bank of New York Mellon head of currency research Simon Derrick said.
He added that ongoing bad news suggested the economy was in for an extended period of recession. A worsening economy prompted the Federal Reserve to slash U.S. interest rates to near zero last week, erasing what was left of the dollar's yield appeal.
The dollar's broad rally has lost steam this month, with analysts saying that a grim U.S. economic outlook has reduced near-term demand for the U.S. currency after deleveraging flows into the currency from hedge funds and other investors have dried up. (Additional reporting by Jessica Mortimer; Editing by Andy Bruce)