The euro rose on Friday on the back of higher stocks, but the single currency struggled to extend its short-covering rally versus the dollar due to technical resistance and options-related selling.

A 0.5 percent rise in European shares .FTEU3 helped support the euro, but its climb petered out around $1.2150, where options were due to expire later in the day.

That level also provided technical resistance, as the $1.2150-1.2155 area offered support during the euro's downward move in May. A break through $1.2150 this month opened the way to a fall to $1.1876 this week, a more than four-year low.

Previously, when we've had a short covering rally in risk assets, and an uptick in euro/dollar in particular, investors were very mindful of technical levels and the market was often willing to sell into key resistance levels, said Valentin Marinov, currency strategist at Societe Generale.

He said the same thing was happening on Friday.

Given the fairly thin European data calendar today, technicals remain important drivers of the price action in FX markets he said.

By 1120 GMT, the euro was up 0.1 percent at $1.2125. Earlier in the day it rose as high as $1.2148 on Reuters data.

Euro/dollar is approaching an important level at $1.2150 -- above that point could see the ongoing correction extend to the upside, said Dag Muller, technical analyst at SEB in Stockholm.

Should we fail to take it out, the market could start to sell, and we can easily get back to those lows.

Market participants said $1.2135 was also in focus, roughly the 50 percent retracement of the euro's 2000-2008 rally.

The euro rose 0.6 percent to 111.25 yen, above an 8 1/2-year trough of 108.86 yen hit on Monday.

Some market participants said a successful auction of Italian bonds helped to bolster the euro. The sale followed strong demand at a Spanish auction on Thursday.

The dollar rose 0.4 percent to 91.73 yen, and was little changed against a currency basket at 87.126 .DXY.

The Australian dollar slipped 0.3 percent as traders booked profits this week's rally.

MORE EURO DOWNSIDE?

Despite the euro's sell-off earlier this week, it is poised to end 1.5 percent higher against the dollar, which would be its best weekly performance this year, as investors have been left with stale short euro positions after its fall to $1.1876.

It has shed 1.5 percent on the month and nearly 16 percent this year, driven lower by fiscal concerns in the euro zone.

Many in the market expect the euro will stay under selling pressure in the longer term on concerns that debt problems in some euro zone countries are spreading.

But some investors breathed a sigh of relief after European Central Bank President Jean-Claude Trichet said on Thursday that three-month emergency loans to banks would continue until September.

(Editing by Mike Peacock)