* Euro inches up, gains limited on Greece concerns
* Aussie falls as RBA surprises by holding rates at 3.75 pct
* Market awaits White House adviser Volcker's testimony
(Adds quotes, updates prices)
By Naomi Tajitsu
LONDON, Feb 2 (Reuters) - The euro edged higher on Tuesday, supported by an earlier narrowing in Greek government bond yield spreads over German debt as investors a waited the European Commission's reaction to Greece's plan to fix its finances.
Greek Prime Minister George Papandreou said the level of Greek and euro zone bond spreads was completely unjustified, keeping up the rhetoric against speculators he blames for targeting his country. [ID:nATH005160] [ID:nATH005161]
The comments came ahead of the publication on Wednesday of EU recommendations to Athens on its austerity plan.
The euro recovered from heavy selling last week on concerns about how Athens will service its ballooning debts. The slide in confidence in Greece triggered selling in its government bonds, blowing out its yield spread with German bond.
Euro gains were limited in quiet trade on Tuesday, and analysts said worry over deficits not only in Greece but in other euro zone countries, including Portugal, would keep investors wary of taking big positions in the single currency.
"Sentiment remains fragile despite the strong U.S. GDP data last week and the Greek situation is still in the background, making investors cautious," said Paul Robson, currency strategist at RBS.
At 1159 GMT, the euro
Greek 10-year yield spreads over Bunds were at 349 basis points, off a session low of 327. Last week, the spread expanded beyond 400 basis points, its widest since Greece adopted the euro in 2001.
For a graphic on the euro/dollar exchange rate and Greek spreads, click on
http://graphics.thomsonreuters.com/0210/EZ_EURGR0210.gif
Underlining the possibility that fiscal woes may extend beyond Greece, European Central Bank Governing Council member Vitor Constancio said on Tuesday Portugal's economy required "significant adjustments". [ID:nLSB002240]
The dollar slipped 0.2 percent versus a basket of currencies <.DXY> to 79.10, but stayed near a six-month high hit on Monday.
AUSSIE DOWN
The Australian dollar
The Aussie held above $0.8735, which analysts said was a key level to watch, given that a fall below that level would take the currency to its lowest in four months.
Some analysts said a general improvement in risk sentiment, albeit slight, would limit Aussie losses in the near term, while they expected the currency to remain in demand in the future.
"Investors may look to use the dip ... as a buying opportunity given that broader 'risk' sentiment appears to be improving and positioning is not stretched," Citi analysts said in a note.
"This suggests there may only be limited scope for stop-loss driven selling and position unwinding to drive AUD lower. On balance, we believe it is unwarranted to shift away from a positive view on AUD."
Risk sentiment will be under scrutiny later when White House adviser Paul Volcker appears before the Senate Banking Committee to defend the administration's proposal to limit risk-trading by banks, which spooked investors and triggered a sell-off in equities when it was unveiled last month.
According to testimony obtained by Reuters, Volcker will urge Congress to curb the risks taken by large banks to help prevent them from being treated as "too big to fail". (Additional reporting by Neal Armstrong, editing by xxx)