* Euro share rises to 47.5 pct from 42.4 pct
* C.bank turns more cautious due to global crisis
(Adds background on global reserve currency)
By Yelena Fabrichnaya
MOSCOW, May 18 (Reuters) - The euro's share in Russia's forex reserves, the world's third largest, overtook that of the dollar last year as the country pressed on with a gradual diversification, the central bank's annual report showed.
Russia, along with China, has raised the idea of replacing the dollar as global reserve currency, as both countries fear the United States will inflate its way out of the recession, devaluing their huge holdings of Treasuries.
Russia has proposed to the G20 group of industrial and developing nations the creation of a new reserve currency, to be issued by international financial institutions, ahead of the summit in April, but the proposal got sidetracked.
The euro's share increased to 47.5 percent as of Jan. 1 from 42.4 percent a year ago, according to the report, which was submitted to parliament on Monday.
The dollar's share fell to 41.5 percent from 47.0 percent at the start of 2008 and 49 percent at the start of 2007.
Concern about countries allocating a greater share of their reserves in currencies other than the dollar has been one of the factors weighing on the greenback in recent years.
The euro was broadly flat at $1.35 by 1217 GMT, having
recovered from an earlier one week low
Sterling's allocation in Russia's reserves was broadly steady at 9.7 percent of the cash pile, while yen holdings rose to 1.3 percent from 0.8 percent, the report showed.
Russia's gold and forex reserves stood at $427 billion at the start of 2009, having been depleted by roughly a third in five months by interventions in the currency market in a bid to keep rouble depreciation under control.
In line with other global reserve managers, Russia has taken a more cautious approach with its investments in the face of the global financial crisis.
"In the second half of 2008, due to the global financial and economic crisis and against the backdrop of liquidity problems on external financial markets, the credit risks linked to the Bank of Russia's activity in managing forex reserves have increased," the central bank said in its report.
The regulator said it had reduced the maximum length of deposits on which reserves are placed, giving no more details. It has also reduced credit limits for counterparties on the external market and limited the list of counterparties for deposits on the external market.
Russia has also been gradually increasing holdings in gold -- seen as a safe haven at times of financial market turbulence -- and has banned investment in bonds of agencies such as Fannie Mae and Freddie Mac saying it needed more liquid assets to meet the needs of its own budget [ID:nL5231103].
The report showed that 10.8 trillion roubles ($336.8 billion at current exchange rates) of central bank investments were in foreign bonds.
Of that, debt of European issuers accounted for 6.5 trillion roubles, U.S. issuer made up 4.06 trillion roubles, yen-denominated Japanese bonds 0.15 trillion roubles and bonds of international organisations 0.12 trillion roubles.
The central bank has previously said it keeps over 30 percent of its reserves in U.S. Treasuries [ID:nLQ643537]. (Reporting by Yelena Fabrichnaya, writing by Toni Vorobyova; Editing by Toby Chopra)