FOREX-Euro touches one-week low on growth, banking worries

* Euro extends losses on banking sector worries

* BoE minutes pushes sterling lower

* U.S. CPI (Other OTC: CPICQ - news) in focus as Fed policy outlook in doubt

By Jemima Kelly and Patrick Graham

LONDON, Oct 22 (Reuters) - Sterling and the euro suffered in another choppy day on currency markets on Wednesday, the single currency trading briefly below $1.27 for the first time in a week after a news report that raised concerns over European banks.

The major currency pairs have struggled for direction since a sell-off last week that halted a three-month old rally in the dollar, but two days of negative newsflow have added to broader concerns about growth that should push the euro lower.

Spanish news agency EFE, citing unnamed financial sources, said 11 euro zone banks were set to fail this weekend's long-awaited stress tests. That followed a Reuters report on Tuesday that the European Central Bank was looking at buying corporate bonds to add to the flow of extra euros coursing through the economy.

The euro sank almost half a percent in morning trade before recovering to stand a touch lower on the day at $1.2706.

"We're still in a very messy place at the moment," said a dealer with one London bank.

"On the one hand you have all these predictions that the euro should continue to fall, on the other a lack of conviction that the Fed is going to push ahead with the tightening which should drive the dollar higher."

The story on sterling was much clearer, minutes from the Bank of England's latest meeting driving it down around half a percent in morning trade.

While two members voted to raise interest rates, most of the Monetary Policy Committee's nine members saw "few signs" of inflation pressures building, indicating that the drive toward tighter monetary policy was losing some steam.

The pound, already hammered by suspicions that the lack of wage growth and inflation will keep UK rates on hold long into next year, traded a third of a percent lower at $1.6065 and 79.14 pence per euro respectively.

"Calls for a rate hike early next year are diminishing, and if things continue as they are it might not be long before we see the first hike priced in for early 2016 instead," said Alex Edwards, head of the corporate desk at UKForex.

BONDS

The European Central Bank, which will publish the test outcomes for 130 banks on Sunday, warned after the EFE report that final results had not yet been sent to the lenders involved, and it could not comment on individual institutions. Any inferences drawn would be "highly speculative", it said.

But the report just adds to a longer list of concerns about how Europe can get back to the sort of growth it needs to sort out still growing problems with government debt and avoid sinking into a debilitating cycle of deflation.

Several sources told Reuters on Tuesday the ECB was considering buying corporate bonds on the secondary market in an effort to boost the flailing euro zone economy, and could begin buying the bonds early next year.

Fresh ECB easing could restore the interest rate gap between Europe and the United States, helping to underpin the dollar.

"For all the slight doubts around the edges of the FOMC (the U.S. Federal Reserve's rate-setting committee) policy bias, people still recognize that the U.S. economy is some years ahead of the ECB, and that on a multi-quarter basis that would suggest that euro/dollar goes lower," said Paul Robson, a strategist with RBS (LSE: RBS.L - news) in London.

While some Fed officials earlier this month flagged a possible global slowdown as a risk to interest rate rises, solid earnings from U.S. tech firms, upbeat U.S. housing data and less worrisome economic figures from China on Tuesday all helped to ease that concern.

Improved risk appetite reduced the need for speculators to hold on to the low-yielding yen, which is often used as a safe-haven currency.

The dollar traded at 106.94 yen, flat on the day.

The dollar index, which tracks the greenback against a basket of major currencies, was up less than 0.1 percent at 85.430. (Additional reporting by Anirban Nag; Editing by Mark Heinrich)