* Euro up vs dollar after ECB decision and Draghi * ECB leaves growth outlook unchanged NEW YORK, June 6 (Reuters) - The euro rallied sharply against the dollar in a volatile session on Wednesday after the European Central Bank left both interest rates and the outlook for economic growth unchanged. While investors in other markets would have welcomed further ECB action, a cut in rates or further monetary stimulus would have been negative for the euro. The ECB held its main interest rate at 1.0 percent on Wednesday, resisting international pressure to provide more support for the ailing euro zone economy. Investors also shrugged off comments from ECB President Mario Draghi, who put the onus on European political leaders to resolve the debt crisis. "Lack of negative news overnight and from Draghi prompted a short squeeze," said Michael Woolfolk, senior currency strategist at BNY Mellon. The euro was up 0.8 percent against the dollar at $1.2560, compared with $1.2495 before the ECB rate decision and well above a near two-year low of $1.2286 plumbed on Friday. The euro traded as high as $1.2574, the highest level since May 29, and as low as $1.2438. Investors had been gearing up for the ECB to signal monetary stimulus to bolster the struggling economy and restore confidence in the euro zone. With the euro and the region's stock markets falling sharply in recent weeks given Spanish banking sector problems and the possibility of Greece leaving the euro zone, some investors were expecting the ECB to reassure investors by announcing fresh measures. Instead the ECB's staff kept its forecast for gross domestic product this year at between a contraction of 0.5 percent and growth of 0.3 percent, while slightly narrowing its 2013 forecast range to between flat and growth of 2.0 percent, its prior outlook of flat to growth of 2.2 percent. Draghi ruled out further long-term refinancing operations to boost liquidity, said Ron Simpson, director of FX research at Action Economics in Tampa, Florida, "and basically throws the onus back to politicians by saying it isn't right for monetary policy to fill 'other actors' lack of action.' "It appears no more Band-Aids are forthcoming from the central bank," he said. But Draghi did say the ECB decided to continue conducting its main refinancing operations at fixed-rate tender procedures with full allotment for as long as necessary and at least until the end of the 12th maintenance period of 2012, on Jan. 15, 2013.. The ECB's decision comes a day after Group of 7 finance ministers took no immediate steps to soothe fears over Europe's debt problems but did discuss policy responses, including "progress towards financial and fiscal union in Europe," the U.S. Treasury said. Also on Wednesday, the president of the Atlanta Federal Reserve Bank, Dennis Lockhart, said the U.S. central bank may need to consider additional monetary easing if a wobbly U.S. economy falters or Europe's troubles generate a broader financial shock. U.S. Fed Chairman Ben Bernanke will testify to Congress on the economy on Thursday and any hints on the possibility of more quantitative easing is now key. SPAIN WORRIES Against the yen, the euro rose 1.3 percent to 99.33 yen , well off Friday's trough, which was the lowest level since December 2000. Despite the bounce, the prospects for the euro still look bleak Germany and European Union officials are urgently exploring ways to rescue Spain's debt-stricken banks, although Madrid has not yet requested assistance and is resisting political conditions, EU sources said on Wednesday. "Spain does need international assistance but they are trying to avoid the stigma," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman. "Like Greece, Portugal and Ireland tried to avoid the inevitable."  There is also a risk that Greek elections later this month could lead to Greece leaving the euro. Highlighting the risks to the banking sector from the sovereign debt turmoil, Moody's Investors Service cut the credit ratings of several German banks on Wednesday.

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