CHICAGO (Reuters) - U.S. grain markets rose on Tuesday as investors grew more confident that Europe would resolve its debt crisis and a weaker dollar sparked a rally in commodities.

Italy's successful completion of its closely watched bond auction calmed fears about euro zone debt issues.

The move lifted the euro against the dollar and spurred buying interest in agricultural commodities. However, gains were limited by improved crop ratings for U.S. winter wheat and stiff export competition.

“There is still optimism on Europe, even though we are far from a plan,'' said Dan Cekander, grains analyst with Newedge USA in Chicago.

Data showing a rebound in consumer confidence buoyed Wall Street, and higher crude oil prices added to the momentum for soybeans and corn which are used to produce biofuels.

U.S. crude oil futures rose 1 percent in choppy trade on cautious hope that Europe can muster an effective defense against a spreading debt crisis. The storming of the British embassy in Tehran also kept oil prices supported.

Strength in the external markets helped trigger short-covering in grains after a recent slide in prices to multimonth lows.

Weekly data from the U.S. Commodity Futures Trading Commission showed that noncommercial traders, a category that includes hedge funds, raised their net short position in Chicago Board of Trade wheat to the highest level since at least January 2006.

The report also showed that large speculators pushed their net short in CBOT soybeans to the highest level since July 2010. Noncommercial traders still held a net long in CBOT corn, but it was the smallest since July 2010.

At the CBOT as of 10:32 a.m. CST (1632 GMT), most-active March wheat was up 12-3/4 cents at $6.05-3/4 per bushel.

January soybeans were up 11 cents at $11.32 a bushel and March corn rose 5 cents at $6.03-1/2 a bushel.

WEATHER FACTOR

Improving U.S. wheat crop ratings hung over the market. The U.S. Department of Agriculture late Monday said 52 percent of the crop was rated good to excellent, up from 50 percent a week earlier and 47 percent a year ago.

Crop weather remains favorable for corn and soy regions in Brazil and Argentina. Brazil's new soybean crop now being planted is seen at 74.8 million tonnes, up from the previous view of 73.8 million tonnes, crop analysts Agroconsult said.

Rains over the weekend helped build ample soil moisture in Argentina's main farming region, ahead of sunny and in some places cold weather during the days ahead, local meteorologists forecast.

* Grains in U.S. cents per bushel, benchmark contracts, except soyoil (cents per lb), soymeal (dollars per ton), rice (cents per hundredweight) and EU wheat (euros per tonne).