* Euro rises as Greece sells 5 bln euros in bonds
* Euro supported by short-covering for now
* Dollar edges up vs Japanese yen
* Hawkish RBA comments lift Aussie (Adds comments, details; changes byline)

By Steven C. Johnson and Vivianne Rodrigues

NEW YORK, March 29 (Reuters) - The euro strengthened on Monday as debt-stricken Greece sold seven-year bonds, but investors remained anxious about the country's long-term ability to finance itself at affordable rates.

After hitting a 10-month low below $1.33 last week, the euro rose above $1.35 on Monday as Greece returned to capital markets for the first time since euro zone leaders agreed to extend the southern European country a financial safety net.

Greece's debt management agency said the country sold 5 billion euros ($6.72 billion) of new seven-year debt at 5.9 percent, a yield more than twice that Germany pays. For details, see [ID:nLDE62S0SD]

Despite Monday's gains, analysts saw limited upside potential for the single currency given that the euro zone's debt problems and weak growth meant the European Central Bank (ECB) was in no rush to hike interest rates.

This is a positive followthrough from Friday's relief rally in the euro, but I wouldn't get too worked up about it, said Michael Woolfolk, senior strategist at BNY Mellon in New York.

Analysts said worries about Greece's ability to refinance debt and concern about indebted euro zone countries like Portugal and Spain would weigh on the euro.

Some see the ECB delaying any rate hike until 2011, further reducing the attractiveness of the currency should the U.S. Federal Reserve raise borrowing costs in the interim.

In afternoon trading in New York, the euro was up 0.4 percent at $1.3460 after earlier rising as high as $1.3506, according to Reuters data. Against the Japanese yen, it was up 0.5 percent at 124.61 yen EURJPY=.

The dollar rose 0.1 percent to 92.60 yen. Earlier selling by Japanese exporters ahead of Japan's fiscal year-end pushed it down to 92.36 yen.

Sterling rose 0.5 percent to $1.4971 while the Australian dollar gained 1.1 percent, aided by hawkish comments from Reserve Bank of Australia Governor Glenn Stevens. [ID:SGE62R02Y]

The dollar also fell 0.6 percent to 1.0204 Canadian dollars as analysts said higher commodity prices and expectations that the Bank of Canada may have to hike interest rate sooner than expected helped the Canadian currency.

SHORTS STRETCHED

The euro on Monday was hemmed by options set to expire later in the day. Around 150 million euros' worth of $1.3450 options and 300 million euros of $1.35 options tick over on Monday, according to IFR, a Thomson Reuters service.

Part of its rebound was also ascribed to an unwinding of record high short-euro positions seen when concerns about Greek fiscal problems drove the currency below $1.33. [IMM/FX]

I think the developments late last week did take some of the near-term risk of default off the table, so some of the short-covering is the result of that, said Omer Esiner, senior analyst at Travelex Global Business Payments in Washington. But many analysts said ongoing fiscal issues facing Greece and other euro zone countries would keep the euro under selling pressure in the coming months.

Greek yields are still elevated and Greece is not out of the woods yet by any stretch of the imagination, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

Investors were a bit more optimistic about the U.S. economy, with payrolls data due later this week expected to show employers added 190,000 new jobs in March.

A government report on Monday showed U.S. consumer spending rose as expected in February for a fifth straight month.

Markets do not expect the Federal Reserve to raise interest rates from record lows until the second half of the year at the earliest, though most participants see U.S. rates rising faster than those in Europe or Japan.

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