* IMF's Lagarde backs giving Spain, Greece more time
* S&P cuts Spanish rating to just above junk
* Japan minister warns of economic risks from stronger yen
By Wanfeng Zhou
NEW YORK, Oct 11 (Reuters) - The euro rose against the dollar for the first time in four days on Thursday after the head of the International Monetary Fund said indebted euro zone economies should have more time to cut budget deficits, overshadowing a downgrade of Spain's credit rating.
The dollar slipped against higher-yielding currencies, while the yen weakened broadly after an unexpectedly sharp fall in claims for U.S. jobless benefits spurred investors to sell perceived safe havens and buy currencies with better returns.
Christine Lagarde, the IMF's managing director, said she favored giving debt-burdened Greece and Spain more time to reduce their budget deficits because cutting too far and too fast would do more harm than good.
Lagarde's comments were seen supporting stability in the euro zone and reducing the risk of Greece exiting the 17-member bloc.
Germany, however, responded by saying back-tracking on debt-reduction goals would hurt confidence.
"We had some relatively supportive comments from Christine Lagarde overnight regarding indebted euro zone nations," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "That's a net positive for the euro."
"We also had the better-than-expected economic data this morning out of the United States, in particular much better-than-expected weekly jobless claims numbers, which added to the overall improved mood throughout financial markets."
The number of Americans filing new claims for unemployment benefits fell to 339,000 last week, the lowest level since February 2008, according to government data, suggesting improvement in the labor market.
The euro rose 0.5 percent to $1.2934. It had fallen to $1.2824 earlier in Asian trade, the lowest since Oct. 1, after Standard & Poor's cut Spain's sovereign credit rating to BBB-minus, just above junk status, with a negative outlook.
"It takes away some of the tail risk attached to the euro that even the IMF is ready to give them a bit more time," said Arne Lohmann Rasmussen, head of currency research at Danske Bank. "That's one of the reasons why we like to buy the euro on dips."
The IMF this week released research showing that fiscal consolidation has a much sharper negative effect on growth than previously thought.
The euro also drew technical support after failing to break below its 200-day moving average around $1.2822. Demand from Asian central banks were reported at $1.2850.
"For us the $1.2830 level is a very key level and above $1.3000 we will look to sell," said Stuart Frost, head of Absolute Returns and Currency at fund managers RWC Partners.
"The market has taken the S&P downgrade in a negative way. But with implied vols at such low levels, we expect the euro/dollar to stay in a range in the near term."
Euro/dollar implied volatilities are trading near their lowest in two years, with the one-month trading at around 8.4 vols. Volatilities, which reflect swings in financial asset prices, have been subdued for most of the year partly due to the aggressive flood of money from major central banks.
Uncertainty over when Spain would seek a bailout and fresh concerns over Greece could limit gains in the euro. A request for aid by Spain is widely seen as positive for the euro because it would remove a layer of uncertainty and activate the European Central Bank's bond-buying program aimed at easing pressure on troubled economies.
Against the yen, the euro rallied 1 percent to 101.68 . The dollar gained 0.5 percent to 78.57 yen.
The yen also weakened as speculation grew that the Bank of Japan may take action to curb yen strength. Japan's newly appointed finance minister, Koriki Jojima, said further yen gains would pose major downside risks to the Japanese economy.
Higher-yielding currencies gained. The Australian dollar reversed earlier losses and climbed to its highest since Oct. 2 at $1.0294, after the country's employment rose more than expected. It was last up 0.4 percent at $1.0272.
The Swedish crown fell to a three-month low against the euro after Swedish inflation data came in below economists' forecasts, supporting expectations a rate cut could be imminent. The euro was last up 0.5 percent at 8.6610.
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