* ECB downplays report on bond-buying * Der Spiegel says ECB considering setting yield thresholds * Euro drops, though its falls seen limited * Dollar hovers near 5-week high versus yen By Jessica Mortimer LONDON, Aug 20 (Reuters) - The euro fell on Monday after the European Central Bank brushed aside a report in Germany's Der Spiegel magazine that it w as considering setting yield thresholds for any mo ves to buy the bonds of stru ggling euro sove reign debtors. The ECB said it was misleading to report on decisions that had not yet been taken. Traders said the Der Spiegel report had earlier boosted the eu ro b y lending weight to the view that the ECB would revive its controversial bond-buying programme. The euro was also weighed down by Germany's central bank rea sserting its c oncerns about ECB bond-buying w hich it said posed "considerable risks to stability". However, the currency's falls were expected to be limited, with t he c hances of the ECB taking action o nce the European holiday season ends l eaving investors wary of selling the euro aggressively. The euro fell 0.3 percent to hit a session low of $1.2296 though it stayed within the $1.2240-1.2450 range it has hugged in the past two weeks. It held above chart support at its 21-day moving average of $1.2285. "The Der Spiegel report talking about a possible cap in peripheral bond yields gave the euro a slightly positive tone in early trade, but the negative comments since have taken the gloss off and we have seen it drift lower," said Richard Wiltshire, chief FX Broker at ETX Capital. Market players have been wary about German opposition to ECB bond-buying. But last week German Chancellor Angela Merkel offered a robust defence of ECB chief Mario Draghi, who has been widely criticised in Germany for promising to do "whatever it takes to preserve the euro" and signalling his readiness to resume the controversial bond buying programme. Against the yen, the euro fell 0.3 percent to a session low of 97.79 yen. But it stayed not far from a six-week high of 98.43 yen hit on Friday as the prospect of ECB action kept investors positive and weighed on the safe-haven Japanese currency. Morgan Stanley analysts recommended buying the euro against the yen on expectations Merkel will "maintain support for the Draghi plan" and that "positive rhetoric will likely continue", adding that investors remain short of the euro against the yen. They advise buying at 97.00 yen with a target of 101.60 yen and a stop at 95.70. "We expect policy events in Europe to continue to provide the euro with broad support in the near term, despite the prospect of continued weak growth indicators," they said in a note to clients. The provisional estimates to euro zone purchasing managers' surveys are due for release on Thursday while traders awaited possible hints on a euro zone crisis solution later this week. French President Francois Hollande and German Chancellor Angela Merkel will meet on Thursday, a day before Greek Prime Minister Antonis Samaras arrives in Berlin. DOLLAR FIRM VS YEN The dollar was steady at 79.49 yen, having hit a five-week high of 79.66 yen in early Asian trade as it continued to gain improvements in U.S. economic data have lifted U.S. government bond yields. The 10-year U.S. Treasury yield rose to 1.86 percent last week, bringing the yield advantage over Japanese government bonds close to 1 percentage point, its highest in more than three months. "The steepening of the U.S. yield curve no doubt has led to a rise in dollar/yen," said Adam Myers, currency strategist at Credit Agricole. "The yen will continue to stay under pressure as investors are more willing to take on risk on expectations that something positive will emerge from the euro zone in the near term. Any disappointment will see the yen being bought again." Movements in the dollar versus the yen tend to have a strong correlation with the spread between U.S. and Japanese yields. Analysts say if U.S. Federal Reserve minutes later this week show there has been an active discussion to provide additional monetary stimulus this could put the dollar back under pressure and generate a rally in risky assets.

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