* U.S. dollar falls broadly, reversing earlier gains
* Fears of U.S. bank nationalization grow
* Euro zone worries may renew pressure on euro (Recasts; updates prices, adds comment, changes byline)
By Steven C. Johnson
NEW YORK, Feb 20 (Reuters) - The dollar fell across the board on Friday as investors sought to lock in the currency's steep gains ahead of the weekend amid growing uncertainty about the prospect of U.S. bank nationalization.
The euro surged above $1.28, rebounding from an earlier decline below $1.26, and wiped out its losses on the week as traders abandoned bets that the dollar would keep rising.
Fears that Washington could be forced to nationalize some of the largest U.S. banks also unnerved investors.
According to a Bloomberg report, U.S. Senate Banking Committee Chairman Christopher Dodd said it may be necessary to nationalize some banks "at least for a short time," though the White House later said it believed strongly in a private bank system. For details, see [ID:nN20418647]
Dodd's "comments changed it from a rumor to something being discussed publicly, and that created a classic Friday squeeze," said Michael Woolfolk, senior currency strategist at The Bank of New York-Mellon.
"There was enough uncertainty for people who were long dollars to want to lighten up, because we don't know what next week will bring," he said.
CNBC television reported that the Obama administration intends to provide some details of its bank rescue plan next week.
The euro last traded up 1.4 percent at $1.2838 <EUR=> after having dipped as low as $1.2558 earlier. Against the Japanese yen, the dollar fell 1.4 percent to 92.98 yen <JPY=>, well off a session high of 94.38 yen.
Sterling rose 1 percent to $1.4421 <GBP=>.
The dollar had earlier rallied across the board as tumbling stocks and worries about ailing banks and the global economy boosted the greenback's safe-haven appeal.
But some traders said investors may rediscover a taste for risk if some major U.S. banks are taken over by the government since that suggests authorities were intent on not allowing any more major financial firms to fail.
"It's not something anybody wishes for, but it may be something they are forced to do. At the end of the day, you've got a real crisis of confidence here," said Firas Askari, head of currency trading at BMO Capital Markets in Toronto.
If it were to happen, "I think equities would rally in the short run and the commodity currencies would do well," he said.
The Australian dollar was up 0.3 percent at US$0.6457 <AUD=> on Friday, while the U.S. dollar fell 0.8 percent against its Canadian counterpart to C$1.2484 <CAD=>.
At a conference in New York, European Central Bank Vice President Lucas Papademos said on Friday that countries should strive to avoid taking over banks "to the maximum extent possible." [ID:nN20285537]
But French Economy Minister Christine Lagarde told Reuters at the same conference that there is nothing wrong with nationalizing failed financial firms.
"Nationalization is not a dirty word," she said. [ID:nN20256902]
HOPE FOR EURO ZONE
Hopes for a plan that would help the weakest economies in the 16-member euro zone also lent some euro support, traders said.
Germany's foreign minister said on Friday authorities were considering how financially strong euro zone economies could help weaker members of the currency union, though it was too early to say what measures might be taken.
Recessions in the euro zone and many Eastern European economies to which large euro zone banks are exposed have weighed on the common European currency this week.
Some traders said they expect that pressure to resume after Friday's rally fades.
"The Eastern European scenario that's playing out is having a negative impact on the euro specifically, and it's having a knock-on effect on the pound as well," said Tim O'Sullivan, chief dealer at Forex.com in Bedminster, New Jersey. "I think that could be the theme for the next several months." (Additional reporting by Wanfeng Zhou; editing by Gary Crosse)