* Euro hits 2 1/2-month low vs dlr, dlr index hits 6-wk high
* Report: Austria's No. 4 bank on watchlist
* Austrian bank says report inaccurate
* Year-end short covering boosts dollar broadly (Releads, updates throughout; previous TOKYO)
By Naomi Tajitsu
LONDON, Dec 15 (Reuters) - The dollar hit a 2 1/2-month high against the euro on Tuesday and rallied to a six-week high versus a currency basket as concerns about euro zone banks helped prompt short covering in the safe-haven dollar.
Reports Austria had put one of its major banks on a watchlist stung the euro in early European trade, as they underlined ongoing concerns about the stability of the euro zone financial system and curbed investor appetite for risk.
Following months of selling on the view U.S. interest rates will stay low while those in other countries rise, the dollar has rallied this month as strong U.S. economic data has spurred some optimism the nation's economy is improving.
Analysts said investors were keen to close short positions built up in the dollar all year before 2009 book closings, which may continue to support the U.S. currency for the rest of the month.
"There's still a lot of momentum to stop out short dollar positions," said Carl Hammer, currency analyst at SEB in Stockholm.
Austria's Die Presse reported on Tuesday the country's monetary authorities had put the nation's No. 4 bank Oesterreichische Volksbanken on a watchlist.. Oesterreichische Volksbanken said the report was inaccurate.
Traders sold the euro on the report, which came after Vienna on Monday said it would nationalise one of its banks to avoid a collapse.
By 0915 GMT, the euro had fallen as low as $1.4553 according to Reuters data, falling more than 0.6 percent on the day to hit its weakest since early October.
The report highlighted banking woes and the weak fiscal positions of some euro zone countries. After having its credit rating cut last week, Greece on Monday announced spending cuts and a 90 percent tax on private bankers' bonuses in an effort to rein in the country's debt.
"It's all risk off," said a trader based in London, referring to the Austria bank story.
He added stop losses triggered under the $1.46 level had exacerbated the euro's losses, while bids for the single currency were seen lined up under $1.4550.
FED MEETS
The euro's losses helped to push the dollar up to 76.797 against a currency basket, its strongest since early November.
The dollar rallied across the board, climbing more than half a percent to around 89.20 yen. The yen was supported against most currencies as a slide in risk demand weighed on high-risk currencies, including the Australian dollar.
The Australian dollar fell nearly 1 percent on the day against the U.S. currency, also stung by minutes from the Reserve Bank of Australia's December meeting, which were not as hawkish as the market had expected.
Some saw the minutes as a possible sign the RBA may pause its interest rate raising cycle.
The Federal Reserve starts its two-day meet on Tuesday and is likely to keep rates unchanged near zero. Focus is on the accompanying statement, especially after upbeat sales and jobs data led markets to price in chances of a rate hike in the middle of 2010.
A slew of U.S. data is scheduled to be released on Tuesday, including industrial production for November, the NAHB housing index for December and producer prices for November. (Editing by Chris Pizzey)