* Optimism of euro zone debt solution boosts sentiment
* Euro likely peaking as sentiment remains fragile
* U.S. dollar index heads for worst week since May, 2009 (Updates prices, adds quotes, changes byline)
By Wanfeng Zhou
NEW YORK, Oct 14 (Reuters) - The euro headed for its best week in nine months against the dollar on Friday on optimism that European leaders would take bold steps to tackle the debt crisis, but a lack of concrete actions could limit further gains.
Group of 20 finance ministers and central bank chiefs began a two-day meeting in Paris on Friday, a day after the euro zone's 17 member nations completed their approval of the expansion of the region's bailout fund. See [ID:nL5E7LE00R]
Hopes that officials will agree on the outlines of a plan in time for a European Union summit on Oct. 23 boosted the euro. Discussions that China, India and other fast-growing economies might bolster the capital base of the International Capital Fund to help rescue Greece further lifted sentiment.
That lifted the common currency to a one-month high just beneath $1.39. In the near term, analysts said momentum traders could still push the euro a bit higher, though it remained fragile and may hit a top ahead of $1.40 in the coming days.
"A lot of this is a short-covering rally," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.
Even though there's positive news from the G20 and optimism that European policymakers would take bold actions, "there's still a lot of time in between when these things are announced, when these things can be enacted, and when they can be put in place to actually forestall further contagion," he said.
The euro touched a session high of $1.3895
Data from the Commodity Futures Trading Commission showed Friday that speculators reduced bets against the euro, as they slightly boosted long positions in the U.S. dollar. [IMM/FX]
Talk that the European Central Bank was buying Italian and Spanish debt also helped lift the single currency off an earlier low of $1.3723. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Euro zone debt crisis graphics http://r.reuters.com/hyb65p
Calculator on banks' needs http://r.reuters.com/jyw62s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
SPAIN DOWNGRADE
Standard & Poor's cut Spain's credit rating, underlining the challenges facing euro zone officials to contain the debt crisis. Fitch put a number of European banks on review for possible downgrades.
Greek Finance Minister Evangelos Venizelos pledged to pass sweeping austerity measures in parliament next week, declaring that Greece was in a "fight for our existence."
Inspectors from the European Union, International Monetary Fund and European Central Bank said they would recommend releasing an 8 billion euro tranche of aid that Greece needs to keep paying its bills past mid-November. But they warned that the country was slipping behind on its targets.
Avery Shenfeld, chief economist at CIBC World Markets, said for now, hopes that Greece will receive loans and steps to expand the European Financial Stability Facility (EFSF) have calmed market jitters.
But he added: "an actual plan will be tougher to deliver, and the Greek issue will return as that country inevitably fails to meets its new targets. A default on Greek debt still leaves risk that investors will refuse to fund Spain or Italy, countries that the current EFSF isn't large enough to bail out."
Against the yen, the dollar rose 0.5 percent to 77.22
An increase in risk appetite hurt the safe-haven dollar, which slipped 0.5 percent against a basket of currencies <.DXY>. The dollar index was on track for a weekly loss of 2.6 percent, the biggest since May 2009.
Earnings releases next week from U.S. companies, including
Citigroup