* Rising U.S. yields prompt investors to unwind short bets
* Euro, yen struggles on domestic concerns
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Sept 28 (Reuters) - The dollar gained for a fourth consecutive day on Thursday as a rise in U.S. Treasury yields encouraged investors to trim their short bets, although markets grew cautious of chasing it higher as the currency approached the top of recent trading ranges.
The dollar climbed to a one-month high against a basket of currencies and is on track to post its best weekly performance this year on hopes that U.S. President Donald Trump's administration may be making progress on tax reforms.
"We are in correction mode on the dollar as there is really nothing fundamental that has changed for the U.S. outlook and the ambitious tax plan lacks a lot of details," said Viraj Patel, an FX strategist at ING Bank in London.
The dollar was trading 0.24 percent higher against a basket of currencies. It has gained 2.5 percent since hitting a 2 1/2-year low of 91.35 in mid-September.
Trump on Wednesday proposed the biggest U.S. tax overhaul in three decades, offering to cut taxes for most Americans but prompting criticism that the plan favours the rich and companies and could widen the U.S. budget deficit.
The proposal faces an uphill battle in the U.S. Congress, with Trump's own Republican Party divided over it and Democrats hostile.
But the unveiling of the plan, along with recent hawkish rhetoric from the U.S. central bank, has raised the likelihood of a U.S. rate increase by December to 70 percent compared with less than a third a month earlier. Speculators began to unwind short dollar bets, which had swollen to multi-year highs.
"This is probably the best time for the U.S. to raise interest rates, as short-term growth indicators look robust and market volatility is near record lows and financial markets healthy and near record highs," said Yassir Benjelloun Touimi, a portfolio manager at Dalton Strategic Partnership LLP in London.
The U.S. 10-year Treasury yield rose to 2.3590 percent, its highest level since mid-July and was nearing the top end of a trading range established since early May.
Including the current move, the U.S. 10-year yield has risen more than 12 basis points - putting it on track for its biggest two-day rise in more than seven months.
The dollar's gains were more pronounced against currencies where the domestic story has worsened in recent days, such as the euro and the Japanese yen
Japanese Prime Minister Shinzo Abe called a snap election as the main opposition Democratic Party threw its support behind a fledgling party led by Tokyo's popular governor, Yuriko Koike, in the Oct. 22 vote. The euro has struggled this week after the unexpected outcome of the German elections.
Morgan Stanley strategists said in a daily note a leadership change in Japan could affect domestic risk appetite and the yen.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Saikat Chatterjee, editing by Larry King; Additional reporting by Hideyuki Sano in TOKYO