* Euro rises, supported after German ZEW survey
* Sterling hits 2009 high vs dollar, risk demand grows
* Australian dollar hits 7-mth high versus U.S. dollar
(Adds comment, updates throughout)
By Naomi Tajitsu
LONDON, May 19 (Reuters) - The euro rose on Tuesday, briefly hitting a session high due to a surprisingly big improvement in German economic sentiment, while higher share prices stoked demand for risk, pushing the dollar and the yen lower.
Supporting the euro was a poll by German economic think tank ZEW, whose economic sentiment index rose to 31.1, exceeding forecasts for 20.0 and posting a big improvement from 13.0 in April. This suggested that analysts and investors were not as grim about the economy as before.
The single European currency climbed as high as around $1.3655 after the figures, but pulled back shortly after as the same poll showed deteriorating current conditions, a reminder that a sustained economic recovery remains a long way off.
Analysts said the euro's reaction to the mixed report suggested that market participants saw improving sentiment in the euro zone was boosting demand for risk, even as other data show that the economy remains weak.
"The data was mixed and the euro took some comfort from it, but the reaction was quite short-lived," said Phyllis Papadavid, currency strategist at SG in London.
"The market may have gotten ahead of itself in some sense, because the hard data isn't looking great at the moment, although the financial risk environment is looking better and that's what the euro has been is reacting to."
She also warned that market participants were "grasping for green shoots" of recovery in the global economy, and that the euro and other currencies perceived to be high-risk could come under selling pressure if hard economic data does not support this view.
By 1000 GMT, the euro traded at $1.3625, up half a percent from Monday and recovering from around $1.3420 hit on Monday for the first time in more than a week.
A 1.5 percent rise in European shares helped to keep the euro in demand, as currency traders took rising stock prices as a sign of broadly improving risk appetite.
"Risk demand is improving on the view that the downturn is slowing, although it hasn't reversed," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.
Sterling jumped against the dollar, rallying to its highest level of the year at $1.5498 following reports that the UK has held talks with investors to gauge interest in buying stakes in part-nationalised lenders.
Gains in the euro and sterling helped to push the dollar down 0.5 percent against a basket of currencies, pulling it away from its highest level in nearly a week touched on Monday.
The dollar was flat against the yen at 96.27 yen, recovering from a two-month low of 94.55 yen hit on Monday according to electronic trading platform EBS.
Ongoing bets that the global economy is improving has warmed demand for riskier trades in past weeks.
This has stung the dollar and the yen as some traders unwind positions in the two currencies -- perceived to be safe-haven options during times of uncertainty -- which were taken on since autumn when the global financial market crisis escalated.
Currencies considered to be high-risk, including the euro, sterling and the higher-yielding Australian and New Zealand dollars were sold off, but have since begun to recover.
On Tuesday, the Australian dollar climbed more than 1 percent to $0.7761, its highest level since early October. It climbed roughly 1.5 percent against the yen, which fell broadly against a range of currencies, which also included sterling and the New Zealand currency.
In addition to continuing risk demand, the Australian currency was boosted after Reserve Bank of Australia Governor Glenn Stevens said the country's interest rates were "pretty low".
His comments affirmed expectations that the RBA is near the end of its easing cycle, and that rates will be held steady for now. The central bank has cut rates by 425 basis points since September to a record low of 3 percent.
That remains significantly higher than near-zero rates in the United States, the UK and Japan, while euro zone rates are at a record-low 1.0 percent.
Investors awaited U.S. housing starts data at 1230 GMT for evidence to support optimism about the prospects for an economic recovery, which analysts said may further improve risk demand.
A Reuters poll showed economists expect housing starts to have risen to 0.52 million in April from 0.51 million in March. Building permits are expected to have increased to 0.53 million from 0.516 million.
(Editing by Victoria Main)