By Kevin Buckland

TOKYO (Reuters) - The euro rebounded on Thursday, rising back toward a two-week high to the dollar, as Russian gas began to flow through a key pipeline again, but investors were cautious ahead of an expected European Central Bank interest rate hike later in the day.

The euro gained 0.42% to $1.02215, clawing back most of its sizeable retreat from Wednesday, when it hit an intraday peak of $1.0273, the highest since July 6.

The euro had enjoyed three sessions of strong gains this week on expectations the ECB might deliver a big 50 basis-point (bps) rate hike and a Reuters report that the Nord Stream 1 pipeline would reopen on time following a 10-day maintenance period, and at the pre-shutdown level of 40%.

The link's operator said gas flows had restarted, but it was not yet clear at what level, with Germany's network regulator indicating 30% of capacity.

The European Union asked member states on Wednesday to cut gas usage by 15% until March as an emergency step after President Vladimir Putin warned that Russian supplies sent via the biggest pipeline to Europe could be reduced further and might even stop.

"The risk gas is completely cut off in future because of political disputes about the Ukraine war remain, and are a weight on EUR," keeping volatility elevated, Commonwealth Bank of Australia (OTC:CMWAY) strategist Joseph Capurso wrote in a client note.

Meanwhile, markets are split on whether ECB policymakers will deliver a previously telegraphed 25 bps increase or a half-point rise to try to wrestle down runaway inflation, despite palpable risks of recession.

The ECB is also likely to provide more details of a new tool aimed at controlling outsized rises in bond yields on Europe's periphery.

The situation has been complicated further, though, by the looming collapse of the Italian government.

"If the ECB delivers a 25bp increase and its anti‑fragmentation tool is credible, EUR should not fall too far and remain above parity," CBA's Capurso said.

Earlier, the yen shrugged off the Bank of Japan's as-expected decision to stick with ultra-easy policy settings, continuing to buck the global monetary tightening trend even as it raised its inflation forecast.

The dollar was little changed at 138.19 yen, consolidating below the 24-year high at 139.38 seen one week ago.

Sterling continued to stabilize below $1.20, last trading 0.15% higher at $1.1998, as the field of candidates vying to be Britain's next prime minister narrowed to two, but a winner is not expected to be announced until Sept. 5.

The risk-sensitive Australian dollar added 0.27% to $0.6908, while the New Zealand dollar gained 0.13% to $0.6238.