FOREX-Euro jumps on ECB liquidity moves but doubts remain

* ECB, other central banks to provide dollar funding

* Greek default risk remains; euro may fall back to $1.35

* Dollar/yen rises, traders cite talk BoJ checking rates (Adds quote, details, updates prices, changes byline)

By Wanfeng Zhou

NEW YORK, Sept 15 (Reuters) - The euro rose the most against the dollar in a month on Thursday after major central banks moved to alleviate funding strains for European banks, though few investors expect the rally to last.

The European Central Bank said it will cooperate with the U.S. Federal Reserve, the Bank of England, Bank of Japan and Swiss National Bank to provide three-month dollar loans to commercial banks in an effort to prevent the money market from freezing up. For details, see [ID:nL5E7KF2LG]

The announcement helped push the euro up about 1 percent against the dollar and yen. Analysts said, however, that the single currency's gains could be short-lived as the announcement did little to calm investors' fears of a Greek debt default.

"It's still not really addressing the problem. Overall, we're still bearish on the euro," said Dave Floyd, managing partner and head of FX trading at Aspen Trading Group based in Bend, Oregon.

"Assuming that the $1.3970 level is not broken to the upside, we see the potential for (the euro/dollar) to move back toward $1.35 and $1.34 over the next three to four days," he added.

The euro last traded up 1 percent at $1.38932 , the biggest one-day percentage gain since Aug. 15. It had earlier hit a session high of $1.39370 on trading platform EBS, well off a seven-month low below $1.35 set on Monday.

Euro zone banks have faced dollar funding strains in recent months as fears have grown that Athens would default on its debt, hitting banks that have large exposure to the country.

Analysts said the funding crunch has been ongoing for four months, with dollar-rich U.S. banks reportedly requiring a 130-percent collateral for a loan to European banks.

The ECB already offers seven-day dollar loans every week, and this offer was tapped for the second time in a month on Wednesday. Previously, banks had not used the ECB's dollar operation since February. [ID:nL5E7KE164]

ILLNESS REMAINS

The three-month euro/dollar cross currency basis swap , or the relative premium for swapping euro LIBOR for dollar LIBOR, narrowed to around 89 basis points after the announcement, from as wide as 115 basis points on Monday.

Wider spreads reflect elevated demand to borrow U.S. dollars in the currency forward market and often support the greenback's spot value against the euro.

Win Thin, senior currency strategist at Brown Brothers Harriman in New York, said the ECB's move addresses the "symptoms," one of which is that banks are afraid to lend to each other, but not the "illness," which is that "Greece is insolvent."

"Today's actions won't prevent a Lehman-type event, but they could mitigate the dislocations and market turmoil that will likely result from such an event," he said. "We fully expect policymakers are preparing quietly for a Greek default, and would look for more and more preparatory measures in the coming months."

Lane Newman, director of foreign exchange trading at ING Capital Market, said the currency market has priced in a 90-percent probability of an "orderly default" by Greece.

Alasdair Mackay, director of currency trading at Scotia Capital in London, said the big date to watch out for when dollar demand is expected to be high is at the end of the calendar year.

Adding to strength in the euro were welcome signs from leaders of Germany and France that they were determined to keep Greece in the euro zone. Against the yen, the euro rose 1.1 percent to 106.555 .

The dollar rose 0.1 percent to 76.69 yen , after hitting a session high of 77.335 yen on EBS, with traders citing market talk that the Bank of Japan was checking currency rates. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Padraic Cassidy)