FOREX-Euro recovers, c.banks eyed after RBA rate cut

* Euro recovers, sterling hits 2-1/2-year low

* RBA rate cut stokes speculation of cuts by other c.banks

* Pound stung by reports of RBS emergency funding

By Naomi Tajitsu

LONDON, Oct 7 (Reuters) - The euro rose on Tuesday on growing speculation that some central banks may follow a surprisingly big interest rate cut by the Reserve Bank of Australia and lower their own rates to stem economic deterioration.

Sterling hit a 2-1/2-year low after talk that the Royal Bank of Scotland was seeking government funding raised concerns about troubles in the UK banking sector.

The yen fell after the RBA's stunning rate cut decision, but investors remained wary of taking on risky trades that involve selling the yen for higher-yielding currencies. Markets brushed off the Bank of Japan's decision to hold interest rates at 0.5 percent.

The RBA's 1 percentage point rate cut ultimately boosted the Australian dollar and ramped up expectations that other central banks may also lower rates as the global banking sector screams for help to deal with the credit crisis.

European Union finance ministers were meeting in Luxembourg on Tuesday to hammer out ways to alleviate market turmoil, instil confidence in the banking system and ensure that savers do not lose money on their deposits [nPEK327881].  Continued...