* Euro weaker on Russian sanction fears
* US dollar steady against euro after Tuesday's rally
* Australian dollar gains on higher than expected inflation (Changes dateline from LONDON, adds details, updates prices)
By Karen Brettell
NEW YORK, July 23 (Reuters) - The U.S. dollar held near eight-month highs against the euro on Wednesday as worries over tougher sanctions on Russia and their potential impact on fragile euro zone growth weighed on the single currency.
The dollar broke above technical resistance against the euro on Tuesday after U.S. inflation data showed that prices were increasing, but that inflation was not fast enough to make the Federal Reserve more likely to increase interest rates at a faster pace.
The greenback slightly extended these gains in earlier trading on Wednesday as geopolitical concerns in Europe weighed on the euro, though the price moves were relatively muted.
"The Euro/dollar has broken some higher profile chart levels, but there hasn't been convincing follow through," said Bob Lynch, head of currency strategy at HSBC in New York.
The euro was last unchanged on the day at US$1.3465. It is down from US$1.37 two weeks ago.
Further escalation of tensions between Russia and the Ukraine could weigh further on the euro if more trade sanctions are enforced on Russia.
"Europe is directly exposed to Russia by trade - Germany in particular - so sanctions could potentially have a negative impact on the euro," said Ian Stannard, a currency strategist at Morgan Stanley.
The dollar gained 0.16 percent against the British pound to US$1.7034, after Bank of England minutes failed to boost expectations of an interest rate hike by year-end. GBP/
The dollar index, which tracks the greenback against a basket of six major currencies, was steady on the day at 80.764, not far from a Tuesday high of 80.837 touched on expectations that higher U.S. interest rates are on the horizon.
The Australian dollar was the largest mover of the major currencies, gaining 0.60 percent against the U.S. dollar after a higher-than-expected reading of a key gauge of underlying inflation in June dented market speculation of future rate cuts.
(Additional reporting by Jemima Kelly in London, Editing by W Simon)