LONDON, June 24 (Reuters) - The dollar pared losses and the yen rose on Thursday, as a less optimistic outlook on growth from the U.S. Federal Reserve dented investors' appetite for risk, while the euro was hampered by Greek debt markets.

The dollar had come under some pressure in Asian trade, as investors initially took the view that the Fed's renewed pledge to keep rates on hold for an extended period would be a positive for the world economy.

But European investors chose to focus on the Fed's scaling back of its assessment of the pace of recovery, leading them to buy the yen and to a lesser extent, the dollar.

As the U.S. fiscal stimulus starts to wane, it brings back the deflationary argument. Together with weak U.S. data, there are reasons to be pessimistic and that cannot be a positive environment for risk, said Gavin Friend, currency strategist at National Australia Bank.

By 1051 GMT, the dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was up 0.1 percent at 85.864 .DXY. It had earlier fallen to 85.595.

The dollar pick-up was purely on rising risk aversion, said Christian Lawrence, currency strategist at RBC Capital Markets.

In a statement at the end of a two-day meeting, the Fed took note of pockets of weakness in the recovery, and also issued a cautionary note about volatile markets in light of Europe's debt woes.

The euro fell 0.2 percent versus the dollar EUR= at $1.2285, having risen to $1.2351 in Asia. Traders reported semi-official demand at $1.2270, which supported the downside.

BUDGET FOCUS

Concerns over Greece were hanging over the euro zone, as the cost of protecting its government debt against default hit a record high.

The euro was down 0.8 percent versus the yen EURJPY=R at 109.76 yen as European stocks traded with losses of around 0.8 percent .FTEU3 and U.S. stock futures were down 0.6 percent SPc1, pointing to a lower Wall Street open.

The yen also rose against the dollar, hitting a one-month high at 89.26 yen JPY=.

Sterling rose to a 19-month high versus the euro EURGBP=D4. British assets were bolstered on Tuesday by a tough budget seen taking the necessary action to tackle a huge deficit as fiscal worries plague the euro zone.

The Aussie dollar AUD=D4 reversed gains after rising as high as $0.8771 after Australia's ruling Labor Party elected a new prime minister in Julia Gillard, in a bid to avoid election defeat later this year.

Gillard immediately offered to end a bitter dispute over a controversial super profits mining tax, saying she would throw open the door for fresh negotiations. But she stressed miners should pay more tax.

The Aussie slipped back to trade down 0.5 percent on the day at $0.8690, weighed by the outlook for risk.

I expect the political developments in Australia to be supportive for the Australian dollar, but today it's all about the downturn in risk appetite, National Australia Bank's Friend said. (Additional reporting by Tamawa Desai; Editing by Patrick Graham)

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