* Euro/dlr hits 2-1/2-month low, DXY at highest since Oct
* EZ bank, fiscal concerns, ZEW slip prompt euro selling
* Year-end short covering boosts dollar broadly
(Adds comment, details, updates prices)
By Naomi Tajitsu
LONDON, Dec 15 (Reuters) - The euro hit a 2-1/2-month low against the dollar on Tuesday, stung by concerns about the health of euro zone banks, while a slip in German economic sentiment also prompted traders to dump the single currency.
The dollar rallied broadly, scaling its highest versus a currency basket since early October, as the view for ongoing weakness in the euro zone economy curbed risk demand and prompted short covering in the U.S. currency.
The euro fell to $1.4527 according to Reuters data, its weakest since early October, extending losses after the German ZEW economic think tank said economic sentiment fell in December, suggesting an economic recovery may be sluggish.
Austria's Die Presse reported on Tuesday the country's monetary authorities had put Oesterreichische Volksbanken, the nation's No. 4 bank, on a watchlist.. Oesterreichische Volksbanken said the report was inaccurate.
Still, risk-averse traders sold the euro following the report, which came a day after Vienna on Monday said it would nationalise one of its banks to avoid a collapse.
Tuesday's report highlighted banking woes and the weak fiscal positions of some euro zone countries. After having its credit rating cut last week, Greece on Monday announced spending cuts in an effort to rein in the country's debt.
"Problems in Greece continue, and the news about the Austrian bank yesterday hasn't helped either," said Ian Stannard, currency strategist at BNP Paribas in London.
"Overall, downward pressure on the euro continues, and the weak ZEW survey is also negative."
By 1036 GMT, the euro traded at $1.4545, down 0.7 percent on the day.
FED MEETS
The euro's losses helped to push the dollar up to a 2-1/2-month high of 76.913 against a currency basket.
The dollar rallied across the board, climbing 0.9 percent to 89.35 yen, while also rising against higher-risk currencies including sterling and the Australian dollar.
Following months of selling on the view U.S. interest rates will stay low while those in other countries rise, the dollar has rallied this month as strong U.S. economic data has spurred some optimism the nation's economy is improving.
Analysts said investors were keen to close short positions built up in the dollar all year before 2009 book closings, which may continue to support the dollar for the rest of the month.
"There's still a lot of momentum to stop out short dollar positions," said Carl Hammer, currency analyst at SEB in Stockholm.
The Australian dollar roughly 1 percent on the day against the U.S. currency, stung by minutes from the Reserve Bank of Australia's December meeting, which were not as hawkish as the market had expected.
Some saw the minutes as a possible sign the RBA may pause its interest rate raising cycle.
The Federal Reserve starts its two-day meet on Tuesday and is likely to keep rates unchanged near zero.
Focus will be on the accompanying statement after upbeat U.S. sales and jobs data has spurred some speculation that the Fed may begin winding down its fiscal stimulus measures soon, although few see this happening this month. (Editing by Victoria Main)