FOREX-Dlr holds gains vs euro; recession fears remain

* Global recession fears continue to boost dollar, yen

* Euro hits two-year low vs dollar, six-year low vs yen

* Troubles in central European markets pressure euro

* WSJ report on U.S. housing plan briefly helps sentiment

By Jessica Mortimer

LONDON, Oct 23 (Reuters) - The dollar edged up on Thursday, staying close to two-year highs against the euro and a basket of currencies as investors continued to cut exposure to risk on fears of a looming global recession.

The low-yielding yen hit a six-year high against the euro and its strongest versus the dollar in seven months as traders rushed to unwind risky carry trades, and global stock markets stayed weak due to the ongoing credit crisis.

Trouble in emerging markets compounded worries about the outlook for the global economy as countries such as Hungary and Argentina took desperate measures to shore up their ailing economies. See [ID:nLM137440].

"We are going to see the recent pressures maintained as emerging markets tensions continue. The dollar will remain supported and the high-yielders will stay under pressure," BNP Paribas senior foreign exchange strategist Ian Stannard said.

At 0834 GMT, the euro fell 0.3 percent against the dollar to $1.2806, trading close to a two-year low of $1.2726 hit on electronic trading platform EBS earlier in the day.

Versus a basket of currencies, the U.S. currency .DXY was at 85.585, near 86.070 hit earlier on Thursday for the first time since late 2006.

Against the yen, the dollar fell to a seven-month low of 96.85 yen according to EBS, before pulling back to around 98.00 yen, up 0.2 percent. The euro was little changed at 125.60 yen, having hit a fresh six-year low of 123.43 yen.

A 0.7 percent fall in European shares kept demand low for risky investments.

A Wall Street Journal report that the U.S. is mulling a plan to forestall housing foreclosures [nBNG389655] briefly helped sentiment and prompted the yen to trim some earlier gains, but analysts said that nervousness about risk remained firmly entrenched in the market.

"This is all still very much a risk unwinding story," BNP Paribas' Stannard said.

CENTRAL EUROPEAN TROUBLES HIT EURO

Analysts said worsening troubles in central European markets put further pressure on an already battered euro, given the euro zone's close financial and trade relationships with the region.

"Serious trouble in Eastern Europe is on the horizon ... Owing to the intensive trade integration a deep recession will hit the euro zone much more than the US," analysts at Commerzbank said in a note to clients.

Hungary on Wednesday hiked interest rates by 300 basis points in a desperate bid to shore up its currency, as officials said the country is in talks with the International Monetary Fund to help it ride out the crisis. See [nLM390122].

Sterling was steady against the dollar at $1.6299, after tumbling to a five-year low against the dollar of $1.6203 on Wednesday as concerns about the country's vulnerability to the financial crisis remain.

Bank of England Governor Mervyn King earlier this week said the UK is heading for recession and investors are nervously awaiting GDP data on Friday, which are expected to show the economy contracted in the third quarter.

(Reporting by Jessica Mortimer)