* Euro rises, traders say ECB bond buying helps
* Sentiment upbeat as G20 meets, Spain downgrade shrugged off
* Resistance seen ahead, euro vulnerable to falls
By Nia Williams
LONDON, Oct 14 (Reuters) - The euro gained on Friday, supported by cautious optimism European leaders are closer to agreeing a plan to tackle the euro zone debt crisis, and was on track for its biggest weekly gain since January thanks to a short-covering rally.
Traders said the European Central Bank was seen buying Italian and Spanish government debt, helping the euro reach a session high of $1.3828, though analysts saw limited room for more gains. It was last up 0.1 percent at $1.3785.
On the downside, bids were seen around $1.3720-25, with stops at $1.3705 and larger demand around $1.3680-90. Traders also cited a large options expiry at $1.3800 for 1400 GMT.
Group of 20 finance chiefs and central bank heads meet in Paris on Friday and Saturday. Although investors were not expecting any concrete resolutions to the debt crisis to come out of the meeting, they hoped it would provide an opportunity for officials to agree on the outlines of a plan in time for a European Union summit on Oct. 23.
This enabled the shared currency to recover from a session low of $1.3723, hit after rating agency S&P downgraded Spain's credit rating to AA-minus, mirroring last week's Fitch downgrade.
"Hope has been the driver all week and going into the G20 meeting people are looking for more clarification on what we might get," said Derek Halpenny, European head of currency research in Bank of Tokyo-Mitsubishi.
On the week, the euro was up nearly 3 percent, a gain that would mark the strongest weekly performance since mid-January if it is maintained through Friday.
Analysts also said talk of possible International Monetary Fund support for Europe was helping the euro. A G20 source told Reuters on Thursday the IMF would present a plan to its board to make short-term credit lines available to fundamentally healthy countries hit by liquidity crises.
Such a move would also spark flows out of dollars into euros, boosting the single currency, analysts said, but they were wary of the administrative and political hurdles to be overcome before such a plan could become reality.
Expectations from the EU summit, preceding a G20 meeting on Nov. 3, are particularly high after French and German leaders pledged to unveil a new package for solving the debt crisis by the end of the month, including an agreement on how to recapitalise banks.
EURO FACES RESISTANCE
The euro has recovered strongly from an 8-1/2 month trough of $1.3144 hit on Oct. 4, buoyed by a short-covering rally as investors pared bearish bets. Although it may claw above $1.39 by the end of the month, it looks poised to take a breather after its recent rally, market players said.
"Two weeks ago the market was pitch black and there was a lot of negative new momentum. Now it is slightly more neutral but it doesn't mean anything fundamental has changed," said Hans Redeker, head of global FX strategy at Morgan Stanley.
"The euro is pretty much at the upper end of its trading range," he said, adding that Morgan Stanley were sticking to their forecast that the euro will fall to $1.30 by year-end.
Resistance was seen at this week's one-month peak of $1.3834 on trading platform EBS, with more at $1.3937, a couple of daily highs in September, as well as the 55-day moving average near $1.3957.
"Levels around $1.30-1.33 would be more fundamentally justified but it's hard to tell when market sentiment will turn," said Lutz Karpowitz, currency analyst at Commerzbank.
The euro rose 0.3 percent versus the Japanese yen to 106.19, and was steady against the Swiss franc at 1.2375 francs .
The growth-linked and higher-yielding Australian dollar was up 0.5 percent at US$1.0240 , after hitting a three-week high of $1.0261.
The U.S. dollar rose 0.3 percent versus the yen to 77.07 , near this week's one-month high around 77.48 yen. (Additional reporting by Jessica Mortimer)