* Euro jumps on Nowotny comments on ESM
* Analysts say gains not justified, see move back to $1.2050
* High Spanish yields fan bailout concerns (Updates prices, adds details, adds quotes.)
NEW YORK, July 25 (Reuters) - The euro rose against most major currencies o n Wednesday, recovering from a two-year low against the dollar after a European Central Bank policymaker said he could see grounds for giving the euro zone bailout fund a banking license.
The comments from Ewald Nowotny prompted a flurry of short-covering as the euro jumped higher, with some investors who had bet against the single currency being squeezed out of those positions.
The euro got an added boost when Spain and France said on Wednesday in a joint statement that stability of the euro area needs the adoption of a single supervisory mechanism for the bloc's banks by the end of this year..
ECB Governing Council member Christian Noyer added to positive sentment when he said on Wednesday that Europe needs to implement unified banking supervision, a deposit guarantee scheme and a banking resolution fund..
But many analysts said the move to the upside was overdone.
"A banking license would allow the European Stability Mechanism to leverage its balance sheet and give the fund far greater ability to act in the euro zone credit markets, amplifying its power as backstop for European Union member sovereign bonds," said Boris Schlossberg, managing director of FX strategy at BK Asset Management. The euro/dollar "is grossly oversold and due for some upside relief."
The euro hit a session high of $1.2169 and was last up 0.5 percent at $1.2122.
A banking license would give the European Stability Mechanism more firepower to fight the debt crisis but analysts said the market may have put too much emphasis on the comments, given ECB opposition to date, and investors would likely sell into the euro's rally.
"The market is grasping for any positive news," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C. "It adds to the already somewhat improved tone. Whether or not it lasts is the question."
The euro touched a two-year low on Tuesday against the dollar when some EU officials said Greece was unlikely to be able to pay what it owes and further debt restructuring is likely to be necessary.
The outlook remains deeply negative given spiraling Spanish borrowing costs that have fueled concerns the country will need a full sovereign bailout.
A break below support at the psychologically important level of $1.20 would open up a test of the 2010 low.
The U.S. dollar did pare losses against the euro after data showed new U.S. single-family home sales in June fell by the most in more than a year and prices resumed their downward trend, suggesting a setback for the budding housing market recovery. But that impact was short lived.
"Overall, the data adds to the string of soft U.S. numbers that suggest we could see further quantitative easing from the Federal Reserve," said Vassili Serebriakov, senior currency strategist, Wells Fargo in New York. "While this may dim risk appetite a bit and help the dollar as a safe haven, ultimately this would be a negative for the U.S. currency because of the possibility of further easing."
MORE PAIN FOR SPAIN
Spain paid the second-highest yield on short-term debt since the birth of the euro at an auction of three- and six-month bills on Tuesday, indicating difficulties in future debt sales.
Yields on Spanish debt have jumped since last week when the region of Valencia said it would need financial help from Madrid, with investors concerned other indebted regions will also seek aid.
Delivering yet more bad news for Europe, Moody's changed the outlook on its provisional top-notch rating for the European Financial Stability Facility to negative.
The action was expected given its move earlier in the week to put a negative outlook on Germany, the Netherlands and Luxembourg.
Despite the bleak outlook, the euro's respite against the dollar also pushed it higher against other currencies.
Against the yen, it rose as high as 95.20 yen, having carved out a new 12-year low of around 94.11 yen earlier in the week. Traders in Tokyo cited talk of a euro/yen option barrier at 94.00 and stop-loss offers under the level. The euro last traded at 94.82 yen, up 0.6 percent.
(Reporting by Nick Olivari; additional reporting by Gertrude Chavez-Dreyfuss, editing by Dave Zimmerman)