* Euro up 1.2 pct vs yen at 150.20
* Yen under broad pressure on tamed risk aversion
* Fed to give AIG $85 bln loan, take 80 pct stake
* Markets still choppy; underlying banking worries persist
(Changes byline, adds quotes, updates prices)
By Veronica Brown
LONDON, Sept 17 (Reuters) - The yen fell against the euro and moved well away from recent four-month highs versus the dollar on Wednesday, with risk aversion alleviated after U.S. authorities extended a lifeline to insurer AIG (AIG.N: Quote, Profile, Research, Stock Buzz).
Investors were still on tenterhooks, however, as volatile equity markets reflected a strong sense of unease about financial sector health.
The U.S. Federal Reserve elected to leave interest rates on hold on Tuesday at 2 percent. But it later said it would lend up to $85 billion to AIG -- once the world's largest insurer -- for two years in exchange for a 79.9 percent equity stake [ID:nHKG15677].
Analysts said steps taken by the Fed had been well received for now.
"The action from the Fed was quite positive. They didn't cut rates as they seem to acknowledge clear separation between the needs of the economy and financial sector, Danske Bank currency strategist Kapser Kirkegaard said.
"AIG was simply too big to fail and the implications for most markets would have been overwhelming," he added.
News that British Bank Barclays Plc (BARC.L: Quote, Profile, Research, Stock Buzz) would buy several parts of Lehman, whose collapse on Monday sent global equity markets into a tailspin, also helped paper over deep-seated worries.
European stocks followed their U.S. and Asian counterparts higher, with banks in the vanguard on relief at the AIG plan, which was reflected in currency markets via the yen's retreat.
By 1102 GMT, the euro was up 1.2 percent at 150.20 yen , while the dollar was flat at 105.74 -- but well away from four-month lows seen on Tuesday at 103.51 yen . The single European currency also gained 0.6 percent to $1.4203 .
The Australian dollar was trading at 84.11 yen , well off a 3-1/2 year low of 81.40 yen set in the previous session.
JITTERS REMAIN
While European stock markets rose, shares in UK lender HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) moved violently, falling more than 50 percent at one point, after taking a battering earlier this week. It later recovered after a person familiar with the matter said it was in merger talks with Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz). The two banks declined to comment.
Meanwhile interbank money markets remained stressed.
Overnight dollar funds were borrowed at rates as high as 8 percent earlier in the European session, according to prices indicated on Reuters screens, before easing back later in the session.
Analysts said there was no room for complacency.
"It would be a brave investor who believes the marginal improvement in risk appetite overnight is the beginning of a longer trend, especially with the money markets still gummed up," said Daragh Maher, deputy head of global FX strategy at Calyon.
Britain's economic backdrop continued to show deterioration with data released earlier showing that the numbers of jobless in Britain leapt by 32,500 in August, its biggest rise since December 1992 [nONS003793].
The euro was up 0.3 percent at 79.44 pence .
Minutes of the Bank of England's latest policy meeting showed 8 of 9 policymakers voted to leave borrowing costs on hold at 5 percent, with one policymaker calling for a 50 basis point cut while a hike was also discussed.
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