* Euro regains ground after hitting 1-month low vs greenback
* German economic sentiment index drop weighs on euro
* Euro at 16-month low vs. pound on rate outlook
By Daniel Bases
NEW YORK, May 13 (Reuters) - Disappointing U.S. retail sales data for April pulled the dollar off a one-month high against the euro on Tuesday but it was still stronger on the euro, which was undermined by a sharp decline in investor morale in Germany, Europe's largest economy.
A report that said Germany's central bank would back monetary easing measures to support the euro zone economy added to early selling pressure on the euro.
"At the very margin this (retail sales) report could push out the timing of (U.S. Federal Reserve) rate hikes but probably not discourage the timing of the tapering, that is being reflected in the weaker dollar," said Sal Guatieri, senior economist at BMO Capital Markets in Toronto, noting the greenback's fading upward momentum after the data.
"It is just one report but if some of the other April data come on the soft side it would raise alarm bells," he said.
U.S. retail sales for April were up just 0.1 percent. Economists polled by Reuters had expected an increase of 0.4 percent.
The Fed has kept overnight interest rates near zero since late 2008, but it has started scaling back its bond-buying program, which aimed to keep borrowing costs down and spur investment. That tapering of the program has brought the bond-buying to $45 billion each month from a high of $85 billion.
In the wake of the U.S. data, the euro clawed back ground, having dropped to a one-month low of $1.3700 against the greenback to trade at $1.3720, still off 0.26 percent on the day .
Traders say hedge funds have stepped up euro selling on speculation that the European Central Bank will ease monetary policy next month to counter a strengthening currency and its impact on already low inflation.
Quoting an unnamed source, Dow Jones reported on Monday that the hawkish German central bank was willing to back a negative interest rate on bank deposits and ECB purchases of packaged bank loans if needed to boost inflation.
Earlier the euro had weakened after the monthly ZEW survey of German economic sentiment fell short of expectations. The index dropped to 33.1 from 43.2 in April, missing a Reuters consensus forecast of 41.0 and undershooting even the poll's lowest estimate of 37.1.
The euro plumbed 16-month lows of 81.38 pence, off more than 0.15 percent against sterling. The pound was buoyed by prospects of rate hikes by the Bank of England, perhaps as early as later this year.
Data showed British retail sales jumped in April as rising house prices encouraged shoppers to buy new furniture, flooring and other home decor over the Easter holiday weekend.
The dollar fell from earlier one-week highs against the Japanese currency to trade at 102.11 yen.
(Editing by Catherine Evans; and Peter Galloway)