* Dollar at 6-month high on index, euro weak
* Busy week ahead with ECB, payrolls, Volcker
* Speculation on limiting carry trades weighs on yen crosses
By Charlotte Cooper
TOKYO, Feb 1 (Reuters) - The dollar held at its highest levels in six months on Monday, while the euro huddled near seven-month lows on fiscal concerns, and higher yielding currencies remained pressured by the closing of leveraged trades.
The Australian dollar hovered at its weakest since mid-December as investors briefly unwound yen-funded carry trades on a report that a UK regulator would like to restrain carry trading generally.
Political worries, such as China's protest over the weekend of a $6.4 billion U.S. arms sales to Taiwan, kept sentiment edgy following concerns in the past two weeks about Beijing's credit tightening and U.S. proposals to limit risk taking by banks.
The euro teetered at its lowest since last July, holding just above $1.3850 where one trader reported talk of a barrier yet to be triggered. It tested that level several times.
"The ongoing slide in risk appetite is still the key," said Greg Gibbs, FX strategist at Royal Bank of Scotland in Sydney.
"It feels somewhat negative for the commodity currencies at the moment and a bit better for the U.S. dollar."
Stronger-than-expected gross domestic product data late last week reinforced the view that the United States was recovering from recession faster than the euro zone and Japan.
The U.S. economy grew at a 5.7 percent annual rate in the fourth quarter, its quickest pace in more than six years. That sent the dollar higher, especially against the struggling euro.
Now markets are bracing for a huge week with a number of major central bank meetings across the world and a raft of economic reports out of the United States, culminating in non-farm payrolls data on Friday..
Paul Volcker, a member of the Obama administration's economic team and a former Federal Reserve chairman, will testify on Tuesday to a U.S. Senate committee on the latest White House bank regulation proposals.
"Besides the U.S. jobs report, the focus this week is what Volcker will say about the banking rules," a senior FX manager for a UK bank said.
The dollar index, a measure of the greenback's performance against six major currencies, rose as far as 79.534, its highest since late July, although it struggled to clear the 79.50 point decisively and later hovered at 79.48.
The index ended Friday above its 100-week moving average, a technical level chartists were watching as a bullish signal, and now has a retracement target just above 80, which is a 38.2 percent retracement of its fall between March and late November.
The euro traded at $1.3862, steady on the day after falling 0.8 percent on Friday, but it dipped as far as $1.3852 on trading platform EBS.
The euro has lost more than 3 percent this year as concerns about the fiscal health of some of the smaller euro zone countries including Greece and Portugal have mounted.
Latest data from the Commodity Futures Trading Commission showed speculators increasing their short positions against the euro and going long on the dollar.
The value of the dollar's net long position was $3.11 billion in the week to Jan. 26, reversing a net short position of $3.12 billion in the previous week.
The euro fell 0.2 percent to 124.93 yen, not far from its April low of 124.38 yen, with talk of option barriers at 124.40 yen.
The dollar also slipped 0.2 percent to 90.10 yen, dropping below its 100-day moving average at 90.25.
The yen gained ground from Friday on the Australian dollar, helped early by an online report by the Times newspaper.
The report quoted the head of the UK Financial Services Authority saying he would like to restrain carry trades, where investors borrow at low rates in one currency, such as the dollar or yen, to buy a higher yielding currency.
With share markets weak and nervousness about how far China's tightening steps will pare back growth, the market also trimmed the probability of a 25-basis-point interest rate hike by the Reserve Bank of Australia on Tuesday, although in a Reuters poll 20 economists were unanimous in expecting a hike.
The Aussie was its lowest since mid-December at around 79.42 yen. It slipped to its lowest in a month against the U.S. dollar, hovering just above $0.8800. (Additional reporting by Anirban Nag in Sydney and Satomi Noguchi in Tokyo; Editing by Edwina Gibbs)