* Spain in negotiations with euro zone for aid-sources
* Merkel and Hollande unite in tough message for Greece
* Expectations of ECB action, Fed easing seen boosting euro/dollar
* Fed minutes prompt expectation of easing next month
By Julie Haviv
NEW YORK, Aug 23 (Reuters) - The euro rose for a fourth straight day against the dollar on Thursday to hit a seven-week high on a report that Spain is negotiating with the euro zone over conditions for aid, though a final decision to request a bailout has not been made.
In the talks aimed at bringing down Spain's borrowing costs, the favored option is that the existing European rescue fund, the EFSF, would purchase Spanish government bonds at primary auctions while the European Central Bank would intervene in the secondary market to lower yields, sources with knowledge of the matter told Reuters on Thursday.
The news added to risk sentiment that was already in play after the release of Federal Reserve minutes the previous day that hinted at more quantitative easing in the United States. Sur v eys on French and German business activity tha t wer e not as dour as feared als o benefited the euro.
"We got the pop (in the euro) because we are getting some clarity on this whole bailout package for Spain," said David Song, currency analyst at DailyFX in New York. "Suggestions of a more accelerated approach or common ground is what's helping the euro right now."
The euro last traded at $1.2564, up 0.3 percent on the day, after earlier hitting a peak of $1.2589, its highest since July 4.
Fed minutes on Wednesday showed the U.S. central bank may "fairly soon" opt for more stimulus, which investors expect to be a third round of quantitative easing, known as "QE3."
"While this does suggest that the Fed is one step closer to further policy easing, in our view such a move is not yet a 'done deal' for September given the somewhat firmer economic data released after the August meeting," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.
The Fed has pledged to keep U.S. interest rates low through late 2014.
The foreign exchange markets should be bumpy in the coming weeks as expectations fluctuate ahead of European Central Bank and Fed September meetings, Serebriakov said.
"While there is still uncertainty about the exact policy mix for both central banks, our sense is that the net outcome is likely to be positive for risk sentiment and thus consistent with a weaker U.S. dollar trend," he said.
The dollar pared some of its losses against the euro after St. Louis Federal Reserve President James Bullard told CNBC television that data since the last policymakers' meeting on July 31-Aug. 1 had been somewhat better and that the minutes were "a bit stale."
GREECE EYED
Angela Merkel and Francois Hollande presented a united front towards Greece, telling Athens it should not expect leeway on its bailout agreement unless it sticks to tough reform targets.
The German and French leaders met in Berlin to fine-tune their message to Prime Minister Antonis Samaras, who begins a charm offensive in Berlin and Paris this week in the hope of persuading Europe's big powers that Greece deserves patience.
Analysts, however, saw scope for further gains for the euro in the near term due to expectations the European Central Bank will act to lower Spanish and Italian bond yields next month.
"There is a lot of momentum, people are still short of the euro and you have both sides of the equation, the Europe side and the U.S. side, coming together," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets in London.
"Another round of Fed QE was something many people were talking about but not many were believing. If you look at previous times the Fed has done QE it is undeniably bearish for the dollar."
Childe-Freeman said if Federal Reserve Chairman Ben Bernanke confirms more QE is possible when he speaks at a conference in Jackson Hole, Wyoming, next week and if there are no "nasty negative shocks" from Europe, the euro could rise to $1.2760 -- the 50 percent retracement of the March to July selloff -- next month.
The dollar suffered its biggest one-day loss in nearly two months against the yen on Wednesday after the Fed minutes.
The U.S. dollar last traded down 0.1 percent against the Japanese yen at 78.48 yen with the session peak of 78.69 yen and a session low at 78.34, according to Reuters data.
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