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FOREX-Dollar holds upper hand after solid housing starts data

* Dollar index at 11-month high thanks to dollar's broad gains

* Euro/dollar at 9-month low, risks fall below $1.30

* Dollar/yen seen testing July peak of 103.15 yen

* Sterling at 4-month low after soft UK inflation data

By Hideyuki Sano

TOKYO, Aug 20 (Reuters) - The dollar held firm near 11-month high against a basket of major currencies on Wednesday after strong U.S. housing data added to hopes of a firming recovery in the world's biggest economy.

The dollar index stood at 81.870, having risen to 81.899 in the previous session, its highest level since September.

U.S. housing starts and building permits rebounded strongly in July, suggesting the housing market recovery was back on track after stalling in the second half of last year.

Groundbreaking surged 15.7 percent to a seasonally adjusted annual 1.09-million unit pace, surpassing economists forecast of a much smaller rise to a 969,000-unit rate last month.

The data knocked the euro below its major support around $1.3330, to a nine-month low of $1.3313. The single currency last traded at $1.3321.

That has brought the euro's decline from its 2 1/2-year peak reached in May to almost five percent, as the common currency was hit by worries that tit-for-tat sanctions between the West and Russia could hurt the euro zone economy more than the United States because of its closer economic ties with Russia.

Even without the Ukraine crisis to contend with, the euro zone recovery had been tepid at best as the currency bloc's southern countries continue to struggle under the weight of tight fiscal policy aimed at reducing their debt load.

"The euro looks particularly weak. Investment into the euro zone could stall. I feel it's time to think that the euro will fall below $1.30," said Kyosuke Suzuki, director of forex at Societe Generale.

The dollar also inched up against the yen, rising to three-week highs of 102.97 yen in early trade. Traders see a test of 103.15 yen, a three-month high touched in late July, as likely.

The British pound also lost steam, hitting a four-month low against the dollar after data showed British inflation slowed more than expected and eased pressure on the Bank of England to raise interest rates.

The pound fell to as low as $1.6611 on Tuesday and last stood at $1.6619.

The Australian dollar fetched $0.0297, so far showing limited reaction to comments by the head of the Australian central bank, who repeated warnings against the Aussie's strength.

(Editing by Shri Navaratnam)