* Dollar, yen gain; dlr index hits 2-month high .DXY
* Recession worry raised after Japanese GDP data
* G7 make no mention yen or sterling; Euro, pound fall
* Trichet speech eyed; trading subdued due to U.S. holiday
(Adds quotes, changes prices)
By Veronica Brown
LONDON, Feb 16 (Reuters) - The dollar and yen rose broadly on Monday with recession worries coming to the fore after figures showing Japan's economy shank sharply in the final quarter of 2008.
Additional support for both currencies also came after the weekend Group of Seven meeting made no mention of currency volatility and provided no solace from economic headwinds, ushering the trade-weighted dollar index to two-month highs.
Data released earlier showed an unprecedented slump in exports caused Japan's economy to shrink by 3.3 percent in October-December, the sharpest fall since the first oil crisis in 1974 [ID:nT4861].
Analysts said a strong current of fear was dominating sentiment and supporting a rally in the yen and dollar, with little seen turning that around in the short-term.
"At this stage we're still in an asset deflation environment," said Geoffrey Yu, FX strategist at UBS in London.
"Nothing announced or done by banks in the short-term will be able to counter the fierce economic headwinds -- just look at the Japanese GDP numbers," he added.
The euro neared the two-month lows against the dollar reached in early February, while sterling was near a two-week trough, with both weighed by heightened risk aversion in the market as European equities .FTEU3 fell.
The single currency was also pressured by fresh worries about western European banks' exposure to troubles in eastern Europe as the S&P rating agency warned it could cut the sovereign ratings of Ukraine due to refinancing concerns [ID:nHKG13621].
In a mark of distress, non-German euro zone government debt underperformed benchmark Bunds -- considered the safest among regional sovereign debt -- with the premium investors demand for holding some of periphery debt edging closer to record highs hit last month.
At 1254 GMT the dollar index .DXY stood at 86.676, shy of an earlier two-month high of 86.871, according to Reuters data.
The euro fell 0.7 percent against the U.S. currency to $1.2767 <EUR=> while the pound lost 0.9 percent to $1.4258 <GBP=>.
Against the yen the euro dropped 1.2 percent to 117.12 yen <EURJPY=>, while the dollar dipped 0.2 percent to 91.74 yen <JPY=>. Volumes were thinned by market holidays in the U.S. and Canada.
The dollar briefly edged into positive territory against the yen earlier after Japanese finance minister Shoichi Nakagawa said he would resign if asked to after coming under fire for his behaviour at a G7 news conference [ID:nTKU103264].
It quickly turned back into the red, however, as Nakagawa said Prime Minister Taro Aso had asked him to stay on in the job, adding that he had been affected by medicine he was taking for a cold [ID:nTKU103265].
With U.S. interest rates now standing at between zero and 0.25 percent and UK rates at 1 percent and expected to fall further, investors are focusing heavily on what the next move will be by euro zone policymakers.
Speaking on Saturday, European Central Bank President Jean-Claude Trichet said the ECB had not drawn any particular conclusions after discussions with other banks [ID:nLG571063].
Trichet is due to speak on Monday afternoon and investors will be watching closely for any clues on how much more the central bank is likely to cut rates and whether it is considering unconventional measures to boost money supply.
"Trichet could be another hitch for the euro if it opens the door to another rate cut," Commerzbank currency strategist Antje Praefcke said.
The ECB left rates on hold at 2.0 percent in February but it is widely expected to cut rates in March in an attempt to bolster a flagging euro zone economy.
Higher-yielding currencies were weighed heavily by Japan's weak GDP data, with the Australian dollar particularly weak on concerns about a hit to its trade with Japan.
The Australian dollar was down almost 1 percent against the U.S. dollar at $0.6505 <AUD=>.
(Reporting by Veronica Brown; Editing by Ian Jones)