(Reuters) - The euro rose on Friday on speculation that a new Chinese investment vehicle could provide much-needed funding to heavily indebted euro zone countries but it was still vulnerable while a resounding solution to the bloc's debt crisis remained elusive.

The single currency hit a session high of $1.3434, up 0.6 percent on the day, after Reuters on Friday reported that China's central bank plans to create a $300 billion vehicle to manage investment funds in the United States and Europe.

The move higher is due to real money buying (in the euro) on the back of the China report, said Sebastien Galy, currency strategist at Societe Generale.

It suggests it will make funding conditions easier for struggling euro zone countries.

Sources told Reuters the vehicle was planned well before the start of Europe's debt crisis and is aimed at improving returns on China's foreign exchange reserves.

In earlier trade, the euro had shown little reaction to an agreement by European leaders for tougher enforcement of euro zone budget rules, which did little to change investors' view that there would be no quick-fix solution to the euro zone debt crisis.

While some progress has been made to tackle the euro zone debt crisis, analysts argued it was unlikely European leaders had done enough to convince the European Central Bank to significantly raise the amount of bonds it buys from heavily indebted countries to stabilize their bond markets.

ECB President Mario Draghi welcomed the fiscal pact on Friday, but market participants noted that he offered few hints to the market that he would step up central bank bond buying after the ECB policy meeting on Thursday.

The ECB has capped the maximum purchase of euro zone sovereign bonds at 20 billion euros a week for now and is not considering bigger action in response to the EU summit, ECB sources said on Friday.

The summit outcome, along with the ECB press conference yesterday, make it more likely than not that S&P will carry out its threat to downgrade most of EZ member states in the coming days, said Adam Cole, global head of fx strategy at RBC Capital Markets.

Rating agency S&P on Monday placed its long-term sovereign ratings on 15 euro zone countries on CreditWatch negative, which normally means a chance of downgrade within three months.

The euro was last up 0.4 percent at $1.3405 while it also traded 0.4 percent higher at 104.11 yen, recovering from an earlier fall to 103.15 yen.

Gains in the single currency weighed on the dollar, pushing it nearly half a percent lower against a currency basket to 78.507.

Stocks rallied on the Beijing news, while currencies perceived to be higher risk trimmed earlier losses, suggesting an improvement in risk demand. The Australian dollar traded at US$1.0175, recovering from the day's low of $1.0048.

DOWNWARD RISKS

While EU leaders agreed stricter budget rules for the euro zone early on Friday, they failed to secure changes to the union's treaty covering all 27 member states, meaning a deal will only include the euro zone's 17 members, along with any others who wish to join.

Investors were also pessimistic about plans to lend an additional 200 billion euros to the IMF to help bail out weak countries, on the view that it would not be enough funding power to shield larger countries in trouble.

The market is looking for a quick solution which is impossible ... Countries are reducing their deficits, which is negative for growth in the midterm, and this process will take time, said Marcus Hettinger, global head of currency research at Credit Suisse in Zurich.

But he said the euro's sluggish performance also reflected the loss of its interest rate advantage against other currencies, after the ECB cut rates by 25 basis points to 1 percent on Thursday.