* Merkel wins but must find coalition partner
* Euro zone PMIs improve, but German factory PMI dips
* Aussie rises as China manufacturing growth picks up
By Jessica Mortimer
LONDON, Sept 23 (Reuters) - The euro turned lower on Monday, failing to hold gains, due to uncertainty over how long it will take Angela Merkel to form a coalition after her party's resounding victory in Sunday's German election.
Merkel's conservatives fell short of the votes needed to rule on their own and may have to convince leftist rivals to join them in government.
The euro dipped 0.1 percent to $1.3503, staying below chart resistance at last week's 7-1/2 month high of $1.3569.
"It will be tough to buy the euro strongly on the German elections as it will be some time before we know what kind of coalition we will get," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.
Data showing above-forecast euro zone private sector business activity this month gave the single currency only a slight lift. German manufacturing activity growth unexpectedly slowed, according to Markit purchasing managers' index (PMI) data
The euro has gained more than 3 percent against the dollar since hitting a low close to $1.31 on Sept. 6 and analysts said it could struggle to extend gains unless data consistently points to an improving euro zone economy.
Tuesday's German Ifo sentiment data was likely to be closely watched, as well as testimony from European Central Bank President Mario Draghi later on Monday.
"The rally in euro/dollar is running out of steam, after the PMI data and due to the blurred situation with German politics," said Arne Lohmann Rasmussen, head of FX research at Danske Bank.
The dollar was steady against a basket of currencies at 80.409, above a seven-month low of 80.060 set last week after the U.S. Federal Reserve surprised markets by keeping the pace of its bond-buying stimulus unchanged.
Comments by a top Federal Reserve official on Friday suggesting the central bank may scale back stimulus next month lent some support to the dollar.
Analysts at UBS, however, said it "seems unlikely" the Fed would choose to act so soon after an unchanged policy decision.
They said last week's Fed decision would keep the dollar weak for one quarter before its longer-term uptrend resumed and revised up their one- and three-month forecasts for euro/dollar to $1.37 and $1.35, from $1.30 and $1.28 previously.
Other Fed officials including Dennis Lockhart, William Dudley and Richard Fisher were due to speak later on Monday.
The growth-linked Australian dollar was up 0.2 percent at $0.9414, after data showing China's factory sector growth accelerated in September.
The dollar fell 0.3 percent to 98.98 yen, with traders saying it faced strong chart resistance before 100 yen.
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