* Majors confined to narrow ranges, yen firm
* Euro struggles to gain headway as mkts anticipate ECB
* ECB expected to cut rates by 50 bps, open door to more
* New Zealand dollar hits 7-year low vs yen
(adds quotes, updates prices)
By Veronica Brown
LONDON, Jan 15 (Reuters) - The euro struggled to make headway versus the dollar on Thursday, while the yen rose with global economic pressure mounting and investors focused on the European Central Bank's rate decision.
Japan's low-yielding currency hit its highest in six weeks versus the euro and four weeks against the dollar, with pressured stocks reflecting escalating fears over the battered banking sector and ongoing risk aversion.
The state of the single currency bloc's economy and public finances moved into sharp focus this week with Standard and Poor's cutting its credit rating on Greek sovereign debt on Wednesday, stoking fears downgrades to other members of the 16-country euro zone could follow.
Wariness over the outlook for Ireland also lingered after Prime Minister Brian Cowen denied a report that he might call on the International Monetary Fund (IMF) for economic help.
Data summed up a bleak picture in Europe, showing Germany's economy grew at its slowest pace in three years in 2008. The euro zone's biggest economy contracted by between 1.5 percent and 2.0 percent in the final three months of the year.
Oil price falls pulled down euro zone inflation to a 26-month low in December, data confirmed on Thursday.
The ECB is expected to lower interest rates on Thursday for the fourth month running and traders are betting the ECB will cut interest rates by least 50 basis points, in line with economists' consensus, taking its benchmark rate to 2.0 percent.
The euro overnight index average (EONIA) curve shows a bigger move but that is distorted by the steep fall in overnight rates thanks to central banks having flooded the financial system with cash. See "The ECB's communication and actions diverged in December and this has allowed the market to ignore recent comments about a move towards a more gradual pace of easing and a possible pause," said Lena Komileva, senior G7 economist at Tullett Prebon in London.
"The big risk, based on recent ECB comments, is that they don't want to move towards the zero (rates) mark too early," she added.
The rate verdict is expected at 1245 GMT, while ECB President Jean-Claude Trichet will hold a post-decision press conference at 1330 GMT.
The euro was flat at $1.3165, hovering above a one-month low of $1.3093 on EBS the previous day.
It was down 0.3 versus the yen at 117.07 yen, having fallen to six week lows earlier at 116.45 according to Reuters data -- fuelled by investors continuing to cut exposure to risk.
Yen strength also saw the dollar fall 0.2 percent to 88.88 yen after hitting a four week low earlier.
HOW DEEP A CUT?
The severity of the crisis of confidence in the euro area was also reflected in bond markets, with euro zone government bonds surging to a record high.
Benchmark German Bunds outperformed as aversion to risk and credit jitters raised the relative cost of debt issuance for other euro zone governments.
Analysts said that ECB President Trichet's press conference would have to acknowledge the situation facing the region.
"Our general feeling is that Mr Trichet will bow down to the reality of the economic news coming through -- it is across the board atrocious," Credit Suisse FX strategist Martin McMahon said.
Calyon strategists said in a note to clients that if expectations for the ECB were not met, it could see the single currency sinking further.
The Australian dollar briefly dropped to a one-month low against the U.S. dollar and the yen after data showed a steep drop in full-time jobs and a rise in the jobless rate last month, reinforcing the case for further rate cuts.
The kiwi fell to 47.20 yen, the lowest since September 2001, before regaining some ground.
The Aussie touched a one-month low of 58.18 yen.
(Reporting by Veronica Brown; Editing by Chris Pizzey and Andy Bruce)