* Euro pinned down as German Ifo misses expectations
* S&P upgrade of Spain's credit rating stems euro's fall
* Dollar firm as upbeat U.S. data lift Treasuries yields
* U.K., U.S. financial markets to close on Monday (Updates market action; changes dateline, previous LONDON)
By Richard Leong
NEW YORK, May 23 (Reuters) - The euro fell to a three-month low against the dollar and a 17-month trough against the pound on Friday, after a soft German business sentiment survey stoked expectations the European Central Bank will lower interest rates next month.
Concerns that Sunday's European Union election results could destabilize some euro zone governments also weighed on the euro.
Germany's leading indicator of business confidence, the Ifo index, pointed to slower growth in Europe's largest economy as the index hit its lowest level this year in May.
"That put pressure on the euro. It reinforces expectations the ECB will ease policy sooner rather than later," said Eric Viloria, currency strategist at Wells Fargo Securities in New York.
The euro fell to a three-month low of $1.3614 before retracing to $1.3630. It broke below its 200-day moving average of $1.3636, seen as a major chart support. Against the yen, the single currency dipped 0.06 percent to 138.81 yen , holding above a 3-1/2 month low set on Wednesday.
The euro fell to a 17-month low of 80.815 British pence before moving back to 80.88 pence.
Trading volume was expected to fade quicker than usual before the weekend. There is a U.K. bank holiday on Monday while U.S. financial markets will be closed for Memorial Day holiday.
Investors also trimmed euro holdings before EU election results due at about 2100 GMT on Sunday, traders said. A strong showing by fringe parties would highlight the anti-euro and anti-austerity sentiment in countries like Italy and Greece that have regained market confidence.
Weaker euro zone members have shown progress in managing their high debt loads. Earlier, Standard & Poor's upgraded Spain's credit rating by a notch to BBB, helping to stem euro's fall and to spur a rally in peripheral euro zone debt.
"Concerns about the sustainability of the peripheral rally could grow and add to bets on more aggressive ECB action in the wake of the EU election," said Valentin Marinov, currency strategist at Citi in London.
The euro's modest losses boosted the dollar index, which tracks the greenback against a basket of major currencies, to its highest in six weeks at 80.443 before easing to 80.368.
The dollar hit a one-week high against the yen, holding gains after U.S. Treasuries yields rose on encouraging domestic housing and factory activity data on Thursday.
Against the yen, the dollar was up 0.2 percent at 101.87 , recovering from the 3-1/2 month trough of 100.805 yen hit two days earlier.
The benchmark U.S. 10-year yield was last 2.536 percent after touching a 1-1/2 week high of 2.566 percent on Thursday. It fell to a 6-1/2 month low of 2.473 percent last week.
(Additional reporting by Anirban Nag in London; Editing by Toby Chopra, Susan Fenton and Meredith Mazzilli)