* Euro up but gains pared on skepticism
* Middle-East demand, strong German survey buoy euro
* Dollar index hits weakest level in eight weeks
* Sterling hits 8-wk high vs dlr after inflation data
(Adds quotes, updates prices)
By Julie Haviv
NEW YORK, Jan 18 (Reuters) - The euro rose against the dollar on Tuesday on buying by sovereign funds and strong German economic data but doubts Europe can boost a rescue fund to head off debt problems may prevent further gains.
After surging more than 1 percent, the euro pared gains against the dollar and traded at the New York session low, the single currency pressured by lack of progress at the two-day European debt summit. More details click,.
The euro was last at $1.3370 on electronic trading platform EBS after falling to the New York low of $1.3365, more than a cent from the global session peak of $1.3467.
The euro nevertheless has outperformed the dollar in six of the past seven sessions, contributing to upbeat outlooks for the currency shared by 17 nations.
European shares, meanwhile, hit their highest close in more than 28 months.
The euro had earlier gained more than 1 percent against the dollar after Germany, Europe's largest economy, showed its ZEW headline economic sentiment indicator surged to its highest reading in six months, jumping to 15.4 points in January from 4.3 points in December and racing past forecasts for a reading of 6.8..
"The strong ZEW is only adding to positive euro sentiment," said Audrey Childe-Freeman, EMEA head of currency strategy at JPMorgan Private Bank. "We had a hawkish ECB last week, there is greater risk appetite and the currency market is rewarding currencies where they believe interest rates will start to normalise."
Germany's ZEW numbers came less than a week after comments on inflation from European Central Bank President Jean-Claude Trichet prompted talk that euro zone interest rates could rise sooner than previously thought.
Childe-Freeman said there was some optimism that EU leaders were responding faster than in previous crises, but she said the euro would face strong resistance at $1.35 until there was more information on the rescue plan.
Demand from Middle East accounts and reports Russia was considering buying euro zone debt lifted the euro, a trader said.
Russia's Finance Minister Alexei Kudrin said on Tuesday the country was supportive of the euro zone's efforts to see off a debt crisis and could buy new bonds from its European Financial Stability Facility (EFSF) rescue fund.
But he knocked down a newspaper report that Russia, holder of world's third largest reserves, was ready to resume buying Spanish debt, which it dropped as an investment after Spain was downgraded in November..
The euro's gains helped push the dollar to its weakest in eight weeks against a basket of currencies at 78.686. It last traded at 79.061.
Sustainable euro gains will require additional measures by EU officials to address the block's deep-rooted debt problems, according to Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
"While the dollar faces continued near-term headwinds as a result of the recent improvement in market sentiment, its medium-term outlook remains relatively bright, given recent signs of improvement in America's recovery and the potential for credit concerns to remain a drag on the euro," he said.
EURO ZONE FOCUS; STG, CAD GAIN
European finance ministers agreed on Tuesday to take their time over strengthening the euro zone's rescue fund and delay publishing new stress tests on the region's shaky banks until the second half of the year.,
"There are still faultlines, especially pertaining to issues about the expansion of the rescue fund," said Simon Derrick, head of currency research at Bank of New York Mellon. "But countries like Russia and China need the euro as a credible alternative currency."
Sterling also hit an eight-week high of $1.6060 after much higher-than-forecast UK inflation data while the Canadian dollar hit a two-and-a-half year high of C$0.9837 per U.S. dollar.
(Additional reporting by Nick Olivari and Gertrude Chavez-Dreyfuss in New York and Anirban Nag in London; Editing by Andrew Hay)