* Dollar rises vs yen on measures to shore confidence
* Yen falls broadly as risk aversion abates
* Paulson urges government: Spend billions on bad debt
* U.S. stocks surge, 3-month U.S. T-bill rate rises (Adds details, updates prices, changes byline)
By Nick Olivari
NEW YORK, Sept 19 (Reuters) - The yen fell on Friday and was set for its worst one-day drop versus the dollar in over five months as steps by U.S. authorities to boost morale in distressed financial markets revived global appetite for risky trades.
U.S. Treasury Secretary Henry Paulson urged the government to spend billions of dollars to deal with toxic mortgage assets choking the financial system, while the Federal Reserve said it would provide loans for purchases of high-quality asset-backed commercial paper from money market funds.
Those developments pressured the yen, which had tapped safe-haven flows from the markets turmoil, sparked by the collapse of Lehman Brothers Holdings this week and forced the government to bail out insurer American International Group.
"The picture has changed dramatically and the biggest loser is the yen as risk appetite returns," said Ronald Simpson Managing, director of global currency analysis at Action Economics in Tampa, Florida.
The dollar rose as high as 108.06 yen <JPY=>, a 10-day peak, according to Reuters data. It was last up 1.7 percent at 107.30 yen, its biggest one-day gain against the Japanese currency since early April.
The euro rose to 155.53 yen <JPYEUR=> at one point and closed at $155.46, up 2.8 percent on the day. That buoyed the euro zone single currency against the dollar.
The euro rose 1.1 percent at $1.4490 <EUR=>, after dipping to $1.4150. The euro climbed to a session high of $1.4498 late in the New York session after breaching a technical level and as some investors sold positions ahead of the weekend.
"There was a technical pop above $1.4450 and traders are also taking profits on their long dollar positions ahead of the details of the U.S. government (financial markets) rescue plan," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
STILL SOME SCEPTICISM
Paulson will ask Congress to take action next week on legislation to calm the turbulence on financial markets.
Despite the initial optimism over the rescue plan, traders said the currency market remained sceptical.
"There is a lot of scepticism in the market, and that seems to be evident by the way the euro has rebounded, the pound, Canadian and Aussie dollars too," said Jon Gencher, director of FX sales at BMO Capital Markets in Toronto.
"The market is waiting to see how this whole thing is going to pan out."
Shares on Wall Street .DJI powered higher, while oil CLc1 rose above $100 per barrel in its biggest three-day rally in a decade and gold <XAU=> climbed.
The three-month U.S. Treasury bill rate jumped to about 1.08 percent at one stage from around 0.26 percent in response to the measures to thaw the credit markets.
"It's all part of the program to restore confidence in financial markets. They are absolutely petrified of just a run on financial assets and they came very close to that on Thursday," said Boris Schlossberg, director of currency research at GFT Forex in New York.
"It seems to be working ... Risk aversion for the time being has been stemmed."
Higher-yielding currencies such as the Australian dollar also surged as investors regained some confidence. The Aussie dollar rose as high US$0.8361 <AUD=> versus its U.S. counterpart. It was last up 4.1 percent at US$0.8349.
The Aussie had its best one-day gain against the U.S. dollar in almost 10 years. The Aussie jumped 5.9 percent against the yen to 89.55 yen <AUDJPY=R>. (Additional reporting by Gertrude Chavez-Dreyfuss and Lucia Mutikani; Editing by James Dalgleish)