FOREX-Euro off 4-yr low vs dlr as investor gloom eases

* Euro edges up from Monday's four-year low vs dollar

* Greece gets EU aid; ECB drains funds

* Money market strains limiting euro upside

By Natsuko Waki

LONDON, May 18 (Reuters) - The euro edged up from the previous day's four-year low in choppy trade on Tuesday as investors took heart from news that financial aid for Greece was coming through as planned.

Officials said Greece received a 14.5 billion euro emergency loan from the European Union and would use some of the money to repay in full an 8.5 billion euro bond maturing on Wednesday [nLDE64H0X9].

This helped narrow the 10-year Greek/German government bond yield spread and cut the cost of insuring against a Greek default, supporting the euro.

Details of the European Central Bank's bond buying programme announced on Monday and its operation to drain extra liquidity created by buying debt also eased concerns the bond purchases would lead to a form of quantitative easing.

All of this prompted some investors to unwind their bets against the euro, whose short positions reached record levels last week as concerns grew that austerity measures would hit growth in the region.

"Some of the market instability has started to subside, at least for the moment," said Robert Minikin, currency strategist at Standard Chartered.

The euro was up 0.15 percent at $1.2412 , having hit $1.2234 on Monday. It rose 0.4 percent to 115.19 yen . The euro has lost more than 13 percent this year against the dollar and yen, making it the worst performing major currency.

It lost some ground after German think tank ZEW's index of economic sentiment fell in May more than expected. [ID:nLDE64H0T1]

The dollar rose a quarter percent to 92.82 yen . It fell 0.1 percent to 86.114 against a basket of major currencies <.DXY> but stayed not far from 87.063 hit on Monday, its highest since March 2009.

The ECB drained 16.5 billion euros in one-week funds from euro zone money markets to offset extra liquidity created by its recent government bond purchases [ID:nFAE005711].

MONEY MARKET PRESSURE

Despite some easing of risk aversion, money markets still showed signs of stress, limiting the euro's upside.

Three-month interbank dollar lending rates rose to 0.46469 percent in London fixing from 0.46 on Monday , their highest since August, reflecting strong demand for dollar funds.

Euro rates eased to 0.63 percent from 0.63125.

"While the worst market fears may have been assuaged to an extent, the risks hanging over the banking sector because of increased funding costs and the effects of a potential sovereign restructuring remain in place," Citi said in a note to clients.

"With euro/dollar trading having tracked the relative stock market performance of the European banking sector closely since the start of the year, removal of these concerns may represent the key to stopping the euro's slow descent."

Euro zone finance ministers met in Brussels on Monday to smooth out details of the 750 billion euro rescue plan they announced a week ago. [ID:nLDE64G290]

A senior member of Germany's parliament said the country's contribution to a $1 trillion euro zone rescue package should be passed this week by the Bundestag's lower house [ID:nLDE64H0QI].