LONDON (Reuters) - The euro fell against the dollar on Tuesday on banking sector concerns but pared losses as a key measure of German business sentiment beat forecasts, triggering optimism the euro zone's biggest economy was recovering.
The German Ifo institute's business climate index rose to 93.9 in November from an upwardly revised 92.0 in October, and beat forecasts of 92.5. The current conditions index rose to 89.1 from 87.4 the previous month, and beat expectations of 88.0.
Separate data showed Germany's economy grew 0.7 percent in the third quarter, unchanged from a preliminary estimate.
"The economic recovery is continuing and we expect growth to maintain its high momentum in the fourth quarter," said Ralf Umlauf, economist at Helaba.
"Despite the improvement, the Ifo Index is still at a moderate level, historically. We therefore do not infer that there will be pressure on the European Central Bank to herald a change in interest rate policy in the immediate future."
Earlier, the euro was hurt on a German media report the majority owners of WestLB WDLG.UL were threatening not to support the stricken German landesbank's requirement for more capital, citing financial sources.
Worries about the global banking system, including a report published on Monday by U.S. ratings firm Standard and Poor's which raised concerns about the health of some major banks, prompted investors to pare back on riskier assets.
"Rallies on risk assets are showing diminishing returns, and major currencies are looking stretched against the dollar," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
European shares were down 0.7 percent .FTEU3 while the bank sub-sector of the DJ Stoxx 600 .SX7P fell 1.6 percent.
By 0943 GMT, the euro was down 0.2 percent on the day at $1.4930, after falling as low as $1.4889. It hit a one-week high of $1.5001 on Monday.
Traders cited options with a strike price of $1.5000 and $1.5050 set to expire later in the day.
The dollar index, which tracks the performance of the greenback against a basket of six other major currencies, was up 0.2 percent at 75.257 .DXY.
Some investors buy the dollar, seen as a safe haven, against other higher-yielding currencies and sell assets like stocks and commodities when economic optimism diminishes.
The yen was also broadly firmer, with the dollar down 0.3 percent to 88.63 yen, having earlier touched a six-week low of 88.56 yen on trading platform EBS.
