* Euro gains on short-covering, stop loss buying
* Merkel does not rule out Greek debt haircut
* Euro vulnerable to flare up in "fiscal cliff" worries
By Nia Williams
LONDON, Dec 3 (Reuters) - The euro hit a six-week high against the dollar on Monday, with some investors trimming bets against the single currency on signs Germany may be open to a Greek debt write-down.
German Chancellor Angela Merkel said on Sunday Greece's creditors may look at writing down more of its debt, a move that would make the country's debt burden more easily sustainable.
The euro climbed to $1.3048, its highest since Oct. 23, before paring gains to last trade up 0.4 percent on the day at $1.3039.
Traders said stop loss orders were triggered on the break of $1.3030, and market players who had previously bet against the euro were squaring their short positions as it moved higher.
There was talk of an options barrier at $1.3050 with some traders expecting sellers around that level.
"Merkel is sounding a bit more flexible and we are getting positioning moves and a bit of flow moves," said Daragh Maher, FX strategist at HSBC.
"But I still think we are in a market where the reflex is to not really like the euro. A number of people have been trying to sell this rally and perhaps getting caught the wrong way, and that's why we are able to push higher."
The euro was helped by Spanish and Italian bond yields falling as investors became more confident about buying euro zone debt, and Greek bonds rallied after the announcement of details of a debt buy-back.
A slightly better-than-expected Spanish manufacturing PMI survey -- on top of signs of quicker Chinese growth -- also strengthened investor appetite to take on risk.
The final reading for the HSBC China Purchasing Managers' Survey (PMI) rose to 50.5 in November from 49.5 in October, suggesting the pace of manufacturing activity quickened for the first time in 13 months.
Traders said short-covering in the euro was particularly active against the Australian dollar, which was hit by below forecast retail sales data and expectations that the Reserve Bank of Australia will cut interest rates on Tuesday.
The euro rose more than 0.7 percent against the Aussie to hit one-month high around A$1.2530.
The Aussie weakened 0.15 percent to $1.0414, falling as low as $1.0393 at one point.
FISCAL CLIFF RISKS
Despite the euro recovering from falls after ratings agency Moody's downgraded the euro zone rescue funds late on Friday , the single currency looked vulnerable to continuing concerns about how the euro zone will deal with its debt crisis and worries about the U.S. "fiscal cliff".
The combination of U.S. government spending cuts and tax rises is due to be implemented in early 2013 and may cut the federal budget deficit but tip the economy back into recession.
Signs policymakers are struggling to reach an agreement to avert that scenario could boost demand for the highly liquid dollar, which is considered a safe haven currency.
"Resolution of the U.S. fiscal cliff still seems some way off, and it is increasingly likely that a comprehensive agreement will be delayed into the new year, meaning the economy may go over the cliff in January only to be hauled back up again soon after," said Simon Hayes, analyst at Barclays Capital.
The dollar fell 0.3 percent to 82.15 yen, retreating from last month's peak of 82.84 yen.
The yen has been under pressure on expectations that a likely change in Japan's government later this month would lead to aggressive monetary easing.