* Euro steadies before ECB rate decision
* ECB seen keeping rates at 2%
* BoE seen likely to cut rates by 50 bps to 1%
By Masayuki Kitano
TOKYO, Feb 5 (Reuters) - The euro steadied against the dollar on Thursday, after falling sharply the previous day due to a downgrade of Russia's sovereign rating, as investors awaited a rate decision by the European Central Bank.
The euro came under heavy pressure on Wednesday after Fitch Ratings downgraded Russia's sovereign rating, underscoring worries that a sharp downturn in Eastern Europe could hit the euro zone economy hard.
The euro was also hurt by Kazakhstan's central bank's decision to devalue the Central Asian country's tenge currency by about 18 percent on Wednesday.
"Heightening worries about economies and currencies in eastern and central Europe such as Russia and Kazakhstan tend to spur euro selling and yen buying," said Masafumi Yamamoto, head of foreign exchange strategy in Japan for the Royal Bank of Scotland, in a research note.
The euro is likely to stay weak against the yen, he added.
The euro was little changed from late U.S. trading on Wednesday at $1.2844. It slid more than 1.4 percent on Wednesday, basically erasing the gains it had made on Tuesday.
Market players are reluctant to hold onto positions over a long time period and have tended to close out positions relatively quickly, said a trader for a Japanese trust bank, adding that the environment was not ripe for taking risks.
The euro has fallen roughly 8 percent so far this year, and a fall below $1.2706 on trading platform EBS would take the single European currency to a two-month low.
Against the Japanese currency, the euro fell 0.2 percent to 114.56 yen.
The dollar eased 0.2 percent to 89.22 yen.
LOOMING RATE DECISIONS
The ECB is widely expected to keep interest rates at 2.0 percent when it announces its rate decision later on Thursday, with most market players expecting the central bank to lower rates by 50 basis points in March.
Market players will be watching for any hints from ECB President Jean-Claude Trichet that the ECB may slow the pace of future easing, after more than halving the key euro zone rate in the last four months.
"The euro's upside will likely remain capped as the ECB is seen lowering rates even if the central bank keeps rates unchanged this time," said Nobuaki Kubo, vice president at BBH Investment Services.
Given the euro zone's economic woes and decline in inflation, market expectations for the ECB to lower rates are likely to linger, traders said.
Data released last week showed that euro zone inflation plunged in January to the lowest in nearly 10 years, with consumer prices rising 1.1 percent year-on-year, down from 1.6 percent in December.
Sterling dipped 0.2 percent to $1.4442 before the Bank of England's rate decision later on Thursday. The BoE is seen likely to cut rates by 50 basis points to a fresh record low of 1.0 percent.
Market players will look for any hints on how far the BoE will lower rates in coming months while also focusing on any chance the central bank will use other measures, including quantitative easing, traders said.
The New Zealand dollar rose 0.2 percent to $0.5085, boosted by better-than-expected jobs data.
New Zealand's employment rose 0.9 percent in the fourth quarter, better than market expectations for a 0.7 percent drop. The jobless rate hit a five-year high of 4.6 percent but was a tad below market expectations for 4.7 percent. (Additional reporting by Kaori Kaneko; Editing by Brent Kininmont)