NEW YORK, June 15 (Reuters) - The euro rallied to a two-week high against the dollar on Tuesday as solid demand at European debt auctions soothed worries about the debt crisis and prompted investors to cover short positions in the single currency on increased risk appetite.

Gains in the euro were limited, however, after economic think-tank's ZEW German investor sentiment index fell far more than expected in June, stirring some concerns about the euro zone's economic outlook.

Spain raised 5.2 billion euros at its 12- and 18-month T-bill auctions on Tuesday, while Belgium raised 2.5 billion euros in a heavily oversubscribed auction, and Ireland sold 1.5 billion in bonds. 

The refundings went better than expected, or at least they can get their business done without having to be exorbitantly expensive. I think that's really important, said Andrew Busch, global currency and public policy strategist at BMO Capital Markets in Chicago.

We have run the cycle of downtrend pressure on the euro for the time being, he added.

In midday New York trading, the euro was up 0.9 percent at $1.2330 EUR=, after rising as high as $1.2344 on electronic trading platform EBS, the strongest level since June 1.

The euro closed on Monday above its 14-day moving average for the first time since mid-April.

Analysts said euro short positions were very stretched, with traders taking profits on current positions without taking on new shorts.

Commodity Futures Trading Commission data showed speculators had boosted their bets against the euro in the week ended June 8, with net short positions just below record levels. [IMM/FX]

I think essentially we're at a point right now where the market feels that the worst for the euro has been priced in for the time being, said Boris Schlossberg, director of currency research at GFT in New York. We have sort of run out of fresh reasons to short the euro.

CORRECTIVE MOVE?

The euro has stayed above $1.20, well off its recent four-year low around $1.1876, and traders said central bank bids around $1.2170 helped put a lid on losses. Technical analysts cited $1.2045 to $1.2170 as a support area.

Win Thin, senior currency strategist at Brown Brothers Harriman in New York, said a break of $1.2342 could see euro/dollar move toward $1.2485. The $1.2342 mark is the 38 percent retracement between the pair's post-European Stabilization Plan high of $1.3094 reached in early May and the low around $1.1876 hit last week.

Despite the ongoing euro rally, we have not even hit the minimal retracement target yet of that big move, Thin said in a note. Given that the root problem of insolvency remains in place for several euro zone countries, we continue to view this euro rally as a corrective move before the next move down.

Against the yen, the euro EURJPY= was up 0.6 percent at 112.48 yen. The dollar lost 0.3 percent to 91.24 yen JPY=.

Analysts said concerns about the euro zone will likely remain after Moody's on Monday downgraded Greece's rating to junk status and Spanish Treasury Secretary Carlos Ocana said some Spanish lenders faced a liquidity freeze in the interbank market. 

Greek government bonds will attract an extra 5 percent penalty when banks use them as security for European Central Bank funds, an ECB spokesman said on Tuesday. 

The Swiss franc CHF= jumped more than 1 percent to a one-month high versus the U.S. dollar at 1.1295 francs. (Editing by Leslie Adler)