* Euro gains vs dlr, yen on better PMI, German Ifo data
* Ifo's Abberger sees German recession ending in Q3
* Higher risk FX gain as stocks rise, but sterling falls
* UK Q2 GDP falls 0.8 percent q/q, much worse than expected
(Adds quotes, updates prices)
By Jessica Mortimer
LONDON, July 24 (Reuters) - The euro rose against the dollar and the yen on Friday, buoyed by better-than-expected surveys in the euro zone and Germany which sparked hopes of an improvement in economic activity in the region.
The Ifo German business sentiment index rose for a fourth month running to its highest level since October 2008, while the euro zone's services and manufacturing sectors contracted much less sharply than expected in July.
Ifo economist Klaus Abberger lifted sentiment further when he forecast the German recession would end in the third quarter.
"This is very much more encouraging. The euro zone surveys in general have been positive recently, but these are a big step forward," Investec economist Philip Shaw said.
Some of the shine was taken off, however, by figures showing the UK economy contracted by a much sharper-than-expected 0.8 percent in the second quarter, which sent sterling into negative territory against the dollar.
Sterling was the only faller among perceived riskier currencies, which were otherwise higher as gains in European shares and U.S. equity futures encouraged risk-taking sentiment. This weighed on the dollar and the yen, which typically fall as risk appetite grows.
At 0940 GMT, the euro rose 0.3 percent to $1.4205 and by 0.3 percent against the yen to 134.78.
Among higher risk currencies, the Australian dollar rose by 0.4 percent against the dollar to $0.8160 and 0.2 percent against the yen to 77.45 yen. The New Zealand dollar rose 0.4 percent to $0.6564.
STERLING LOSES SHINE
Sterling fell 0.2 percent against the dollar to $1.6441 as the GDP figures suggested a UK recovery could take longer than previously thought and increased the chances that the Bank of England may opt to add more stimulus to the economy.
"The data are significantly weaker than what we had seen in the surveys, it might just be the lags that are involved, but it casts doubt on whether we will actually see growth in Q3," said Ross Walker, UK economist at RBS Financial Markets.
Despite the euro's gains on Friday, the single currency remained comfortably below a seven-week high of $1.4292 on trading platform EBS the previous day.
It came off those highs in late New York trade following a string of weak U.S. corporate earnings after the Wall Street close, with Microsoft Corp, Amazon.com Inc and American Express all posting disappointing results.
But traders and analysts said market sentiment remained positive, particularly after strong U.S. housing market data on Thursday.
"I don't think last night's weak corporate earnings will be enough to dampen appetite for risk," said Copenhagen-based Nordea currency strategist Niels Christensen. (Reporting by Jessica Mortimer, editing by Mike Peacock)