* Euro, sterling weighed down by bank, econ worries
* Stocks buoyed by UK bail bailout, Obama optimism
* Trade subdued with U.S. markets closed
(Recasts throughout, changes dateline prvs TOKYO)
By Tamawa Desai
LONDON, Jan 19 (Reuters) - The euro and sterling were lower on Monday as investors remained cautious about the banking sector and faltering economy, overriding the latest UK bank bailout plan and optimism for new U.S. stimulus measures.
The euro pared some losses after European shares were more than one percent higher in early trade as recently hammered banks such as Barclays bounced back, buoyed by news of a fresh UK rescue plan for the ailing sector
Britain threw its troubled banks another multi-billion pound lifeline by allowing them to insure against steep losses and guaranteeing their debt to stop the credit crunch pushing the economy into a deep slump.
But ongoing bank troubles were highlighted as shares in Royal Bank of Scotland fell sharply after it said it had made a loss of more than 20 billion pounds ($30 billion) last year, the biggest loss in British corporate history, including a huge goodwill hit on its purchase of parts of ABN AMRO in 2007.
"The UK bailout plan had limited impact on the currency market as it was largely flagged over the weekend. Equity markets opened higher, and there was a modest improvement in risk appetite," said Daragh Maher, currency strategist at Calyon.
"But investors may say, hold on, there was a need for a bailout, so there are questions whether the equities rally will be sustainable," he added.
As of 0838 GMT, the euro was down 0.1 percent at $1.3289, after hitting a low of $1.3272. It had earlier risen to $1.3387 on trading platform EBS, the highest in a week.
The euro fell 0.3 percent to 120.21 yen, slightly below a one-week high of 122.20 yen struck earlier in the day on EBS.
Sterling reversed early gains after the UK Treasury said the BoE would set up a facility to buy private sector assets with an initial fund of 50 billion pounds as part of a multi-pronged plan to save the UK banking sector.
Trade was somewhat subdued as financial markets in the United States were closed on Monday for Martin Luther King Day.
President-elect Barack Obama is set to take office on Tuesday, and many investors have been hoping he will act aggressively to help pull the economy out of recession.
"There have been expectations for the new administration. The issue is the actual details of the economic stimulus package," said Kazuyuki Kato, treasury department manager at Mizuho Trust & Banking. "The market can be volatile as not everyone is sure about the details."
The dollar fell 0.1 percent at 90.60 yen from a one-week high of 91.31 yen on EBS touched earlier in Asian trade.
Higher-yielding currencies such as the Australian and New Zealand dollars gained, rising 0.7 percent and 0.4 percent, respectively. (Additional reporting by Satomi Noguchi in Tokyo; Editing by Andy Bruce)