(Updates price, adds quotes, changes byline)
By Toni Vorobyova
LONDON, Dec 4 (Reuters) - The yen gained against the dollar and higher-yielding currencies on Tuesday as concerns about credit turmoil and escalating tensions in the money market prompted investors to cut back risky positions.
Liquidity in some credit markets is now at its tightest in years, as banks' risk aversion and reluctance to lend is exacerbated by a seasonal lack of liquidity due to high demand for cash to cover the year-end period. On Tuesday, one-month interbank lending rates in the euro (Euribor) rose to near 7-year highs on Tuesday, while one-month sterling London interbank rates (Libor) fixed at a 9-year high.
Credit worries also weighed on financial stocks, contributing to a 1 percent fall in the FTSEurofirst equity index and adding to the risk averse mood in the market.
"We are getting into the period now when liquidity is very much at a premium and the news flow on the turmoil in the credit market does not seem to be abating. Within that context the market still remains very nervous about the potential for further bad news out there," said Kamal Sharma, currency strategist at Bank of America.
By 1145 GMT, the dollar was down 0.7 percent at 109.65 yen <JPY=> while the euro was down 0.4 percent at 161.30 yen <EURJPY=>.
The high-yielding Australian dollar fell 0.6 percent to US$0.8748 <AUD=> and dropped 1 percent to 96.26 yen <AUDJPY=R>.
The euro was up 0.3 percent at $1.4711 <EUR=>, with traders saying the move higher was accentuated by the break through key stop-loss levels.
Euro zone data on Tuesday showed producer price inflation rising more than expected in November, suggesting that the European Central Bank is likely to stress price pressures at the news conference after Thursday's rate decision. It is widely expected to leave rates on hold this week at 4.00 percent.
RATE CUTS EYED
The Canadian dollar was down versus the U.S. currency <CAD=> ahead of a Bank of Canada rate decision, where some analysts are expecting a rate cut.
A rate cut is also seen as a possibility in Britain, where the decision will be announced on Thursday. The euro rose nearly half a percent to 71.30 pence <EURGBP=>.
A key report investors are watching for is Friday's U.S. payrolls data, which is expected to show employers added 75,000 jobs in November.
Markets are fully pricing in a Fed policy easing of 25 basis points next week, with some expectations rising for a 50 bps reduction in rates from 4.5 percent.
The dollar failed to benefit after a summit of Gulf rulers ended on Tuesday with no mention of the dollar's weakness or foreign exchange policy in the final communique.
Some analysts had thought the Gulf countries -- faced with high inflation and a weak dollar -- might use the meeting to announce a revaluation of their currencies or a move away from their dollar pegs.
"After a short term move back, I'd expect speculation to resume," said Elisabeth Grue, emerging market strategist at BNP Paribas.
"Going into 2008, and given the need to tackle inflationary pressures in these countries, these currencies have to strengthen and adjust to the weaker dollar." (Editing by Ron Askew)