* ECB seen closer to bond market action * Reluctance to push euro higher prior to ECB, EU meetings By Julie Haviv NEW YORK, Aug 21 (Reuters) - The euro surged to a seven-week high against the U.S. dollar on Tuesday, fueled by speculation the European Central Bank could soon act to stem the region's debt crisis by lowering Spanish and Italian borrowing costs. Throughout August the euro has rallied and plunged almost daily depending on the latest headlines from Europe. Uncertainties over the effectiveness of ECB bond-buying and worries over the euro zone's debt and economic problems had kept the currency firmly below this month's high of $1.2443. The euro, however, pierced that level after London's Daily Telegraph on Monday gave support to a weekend article in Germany's Der Spiegel magazine that said the ECB planned to put a hard cap on Spanish and Italian bond yields. An ECB spokeswoman, asked about the Telegraph story, repeated the central bank's statement after the Der Spiegel report, saying it was misleading to report on policy decisions that had not been taken. "We're in the midst of a risk rally, with expectations high around what could happen in the first couple of weeks of September," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. The ECB holds its next policy meeting on Sept. 6 and European Union finance ministers meet on Sept. 14-15 - 10 days seen as critical for efforts to quell the crisis and keep Greece in the single currency. The U.S. Federal Reserve will meet on Sept. 12-13. "We may see a dovish Fed and an ECB that firms up its plan," Sutton said. Until September, the euro should be tied to its summer range of roughly between $1.21 to $1.2630, she said. The euro rose to $1.2488, its highest since July 5, exceeding the Aug. 6 peak of $1.2443 reached after ECB President Mario Draghi pledged to do all it takes to preserve the euro. Prior to Draghi's comments, the single currency fell to a two-year low of $1.2040 on July 24. The euro was last at $1.2474, up 1.1 percent, the biggest one day percentage move since Aug. 3. Traders said it extended gains after triggering stop-loss buy orders on the break above $1.2400. "The ECB must act in the bond market because threats, leaks and promises have a limited lifespan. Without ECB intervention Spanish and Italian rates will rise again as the countries no longer have the confidence of the credit markets," said Joseph Trevisani, chief market strategist at Worldwide Markets, Woodcliff Lake in New Jersey The euro rose as high as 99.18 yen, its strongest since early July. It last traded at 98.98, up 1 percent on the day. The euro's gains against the dollar helped push sterling to a three-month high. The Canadian dollar rose to a 3 1/2-month high against the U.S. dollar. DIPLOMACY French President Francois Hollande and German Chancellor Angela Merkel will meet on Thursday, a day before Greek Prime Minister Antonis Samaras arrives in Berlin. Samaras is expected to lobby for a two-year extension of austerity measures to soften their impact, though he is unlikely to win major concessions. The dollar was last down 0.1 percent against the yen at 79.32 yen, but off the high of 79.66 yen hit on Monday, the highest since July 12. Looking ahead, the dollar will likely react to the release on Wednesday of minutes from the latest Federal Open Market Committee meeting, the Fed's policy making arm. Any hint that the Fed may soon embark on a third round of quantitative easing would have a negative impact on the dollar as it is tantamount to the Fed's printing money and dilutes the greenback's value. But any indication that QE3 is not imminent should buoy the dollar. The Australian dollar, meanwhile, was last up 0.5 percent at $1.0492 lifted by Australian central bank minutes showing policymakers thought the full effects of previous interest rate cuts had yet to be felt.