* Better than expected German ZEW index extends euro gains
* Dollar, yen weaken as risk sentiment improves tentatively
* BoJ to buy up to $10.2 bln subordinated loans from banks
* Nervousness ahead of FOMC, BoJ meetings Wednesday
(Recasts, adds quotes, changes bylines)
By Jessica Mortimer
LONDON, March 17 (Reuters) - The euro firmed versus the dollar on Tuesday, testing $1.30 on the back of better than expected results from Germany's ZEW survey of sentiment towards the euro zone's biggest economy.
A broad improvement in risk sentiment weighed on the dollar and the yen -- lending further strength to the single currency.
Traders were wary, however, ahead of U.S. and Japanese central bank policy-setting meetings which both end on Wednesday.
German analyst and investor sentiment unexpectedly rose in March to its highest level in about a year and a half, with the ZEW economic expectations index rising to -3.5 from -5.8 in February, well above forecasts for a fall to -7.4.
The economic think tank also said that, although the economic situation was extremely bad, there were signs of hope and that the bottom of the recession was likely to be reached this summer.
The euro extended earlier moderate gains after the news, briefly taking it back above the $1.30 level against the dollar.
by 1126 GMT, the euro was up 0.2 percent at $1.2994, while the dollar index was slightly lower at 86.957.
"The ZEW is slightly better then expected, this certainly has helped the euro, especially as there had been a fair amount of rumours beforehand that it was going to be a poor number," Bank of New York Mellon analyst Simon Derrick said.
"Once again we ride back again above $1.30 and it feels as the euro is gaining strength," he said.
The Bank of Japan also boosted sentiment by saying it would buy up to $10.2 billion in subordinated loans issued by banks to bolster their depleted capital.
BOJ governor Masaaki Shirakawa said in a subsequent press conference that the programme was aimed at banks facing big risks from falling stock prices..
Against the yen, the dollar rose 0.5 percent to 98.66 yen while the euro gained 0.7 percent to 128.22 yen.
The Bank of Japan is seen keeping interest rates unchanged at 0.10 percent on Wednesday but could increase its outright buying of government bonds.
The policy-setting Federal Open Market Committee panel also kicks off its meeting later on Tuesday. With rates already near zero, the focus is on whether the U.S. central bank will expand its balance sheet further.
There is speculation that the Fed may decide to purchase long-dated Treasuries, but some say those hoping for such an outcome may be disappointed.
"The outcome of the March 17-18 meeting of the Federal Open Market Committee (FOMC) is apt to be identical to that of the January 27-28 meeting," Goldman Sach said in a note to clients.
"While we see several reasons why Treasury purchases make even more sense now than they did then, the FOMC appears disinclined to take this step yet."
(Reporting by Jessica Mortimer; editing by Patrick Graham)