* Middle East, sovereign accounts lift euro off lows
* Portuguese instability, Spain bank worries hamper gains
* Euro could fall back if no agreement on bailout fund
(Updates prices, adds comment, changes byline, dateline, previous LONDON)
By Wanfeng Zhou
NEW YORK, March 24 (Reuters) - The euro rose against the dollar on Thursday, lifted by an increase in appetite for risk, though concern about debt problems in Portugal and Spain could see the single currency come under renewed pressure.
Middle East and sovereign demand helped boost the euro overnight. Traders, however, said the currency will likely struggle to rise further given option barriers in the $1.4250 area and strong resistance near $1.4280, the November high.
Investors moved away from the low-yielding U.S. dollar as world stocks advanced, spurring demand for riskier trades. That helped the euro stay resilient even as Moody's downgraded 30 Spanish banks and pressure mounted on Portugal to seek a bailout after the resignation of the country's prime minister.
"We think these are probably pretty good levels to start shorting the euro," said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington. "This Portugal situation is going to start to become a bigger deal."
The euro was last up 0.2 percent at $1.4114. It hit a low of $1.4053 on trading platform EBS after Moody's downgraded 30 Spanish banks by one or more notches, though notably not the biggest players, Santander and BBVA.
Portugal's Prime Minister Jose Socrates resigned on Wednesday after parliament rejected his government's latest austerity measures aimed at avoiding EU financial assistance.
Socrates remains adamantly opposed to requesting aid from the European Union and the International Monetary Fund and has made it clear he intends to hold that line, at least until a new Portuguese government is formed in the weeks ahead. Lisbon needs to refinance 4.5 billion euros of sovereign debt in April, which could trigger a request for aid.
European leaders are unlikely to take a decision on how to strengthen the euro zone's bailout fund at a summit on Thursday and Friday, delaying the process until June, a development also seen as negative for the euro.
"We think that no agreement at the EU summit on the bailout facilities should erode euro support further in the near term." said Valentin Marinov, currency analyst at Citigroup.
The euro could retrace all of its gains above the $1.40 mark, "which materialized after the recent heads of state meeting in mid-March," Marinov said.
YIELD SUPPORT
The euro was helped by semi-official and Middle Eastern bids around the day's lows and macro account demand. More bids from the Middle East were highlighted at $1.4010/20.
The single currency was also helped by favorable yield differentials as the European Central Bank is widely expected to raise interest rates next month to counter inflation pressures, even as U.S. rates are set to remain near zero.
Data on Thursday showed new orders for long-lasting U.S. manufactured goods fell in February, hinting at some unexpected softness in manufacturing and business investment plans. See
Some in the market question the ECB's intent to tighten monetary policy at a time when some euro zone economies are suffering, an issue that may haunt the euro in the future.
The dollar was little changed at 80.94 yen. Market players remained wary that Japan may intervene further if the dollar drops below 80 yen, especially if such a move occurs in volatile trade.
Traders say Japanese exporters are likely to sell the dollar on any rallies, helping keep the yen stuck in a thin range against the dollar. (Additional reporting by Neal Armstrong in London; Editing by Padraic Cassidy)