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By Wanfeng Zhou

NEW YORK, Sept 21 (Reuters) - The euro rose against the dollar in choppy trade on Friday, helped by speculation Spain may soon request financial aid to help ease the country's debt crisis.

Volume was thin ahead of the weekend and traders said the euro may struggle to extend gains significantly as uncertainty remained about the timing of a potential bailout.

Sources with knowledge of the matter told Reuters Spain is considering freezing pensions and speeding up a rise in the retirement aid as it attempts to meet conditions of an international aid package. "Reports of a Spanish deal as soon as next week helped to boost sentiment and the euro. The market remains prudently bullish buying on dip," said Sebastien Galy, currency strategist at Societe Generale in New York.

The euro rose 0.4 percent to $1.3023, having hit a session high of $1.3047 on Reuters data , not far from a four-and-a-half-month peak of $1.3169 set on Monday.

The dollar slipped 0.3 percent to 79.131 against a basket of currencies, within sight of a six-and-a-half-month low of 78.601 hit last week in the wake of aggressive monetary easing by the Federal Reserve.

"There is still prevailing dollar weakness from quantitative easing in the U.S. and the euro has come out in a new range which looks like it will be more stubborn," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec.

Carl Hammer, chief currency strategist at SEB in Stockholm, said the euro may rise to $1.31 or slightly higher over the coming month but would peak at not more than $1.34-$1.35 because Spain applying for funding would be "the last piece of euro-positive news".

Spain, the new epicenter of the euro zone debt crisis after Greece, Ireland and Portugal, has been hesitating to apply for external aid, creating uncertainty in the markets. Its borrowing costs fell on Thursday at a debt auction but the relief may be short-lived.

"The risk is that if they don't (seek a bailout) investors will panic out of their newly bought Spanish bonds," Societe Generale's Galy said.

There are also concerns surrounding Greece, with negotiators still short of a deal that would unlock the next installment of the country's 31.5-billion-euro bailout package. The dollar was steady at 78.26 yen , well below a one-month high of 79.21 hit on Wednesday after the Bank of Japan boosted its asset-buying program to support the country's economic recovery.

Sterling rose to its highest in nearly 13 months against the dollar at $1.6310, helped by UK public borrowing data that was not as bad as expected. It was last at $1.6280, up 0.4 percent.

The high-yielding Australian dollar climbed 0.6 percent to $1.0499.Additional reporting by Jessica Mortimer in London; Editing by James Dalgleish)

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