* Dollar slips as European stocks gain
* Dollar index down 0.1 pct at 87.701 .DXY
* Yen hits 3-month low vs dollar, mkt eyes 100 yen
* Sterling up vs dollar as bank insurance scheme launched
By Kirsten Donovan
LONDON, Feb 26 (Reuters) - The dollar slipped against a basket of currencies on Thursday as European stock markets extended gains and the British pound got a boost from the launch of a bank insurance scheme.
However, the yen tumbled to a three-month low against the dollar as investors sold the currency amid concerns about Japan's economic outlook.
"Dollar/yen is the focus, and everything else is taking a cue from stock markets," Adam Cole, global head of FX strategy at RBC Capital Markets.
The euro extended gains against the dollar, last up 0.22 percent at $1.2732 <EUR=>, and sterling -- up 0.13 percent at 89.62 pence <EURGBP=> -- after data showing German unemployment rose less than expected in February on a seasonally adjusted basis [ID:nBAE001612]. The single currency remained near recent lows however on ongoing concerns about sovereign credit quality within the euro zone.
Sterling was up 0.12 percent against a broadly weaker dollar at $1.4213 <GBP=> after Britain launched a scheme which could end up insuring more than 500 billion pounds worth of toxic assets in a bid to get lending in the recession hit economy moving again [ID:nLQ412152].
The scheme came after Royal Bank of Scotland (RBS.L: Quote, Profile,Research, Stock Buzz) unveiled a bumper 24 billion pound loss.
"Positive developments for UK banks should help arrest the decline in GBP, but with Bank of England rhetoric still resolutely downbeat...it will be difficult for the currency to build any meaningful gains," said Daragh Maher, Deputy Head of Global FX Strategy at Calyon, in a note.
Data showing portfolio flows out of Japan last week underscored the yen's loss of favour as a safe-haven bid, with many now discussing how far it can fall as technical sell signals fuel negative yen sentiment.
The yen has shed more than 10 percent since hitting a 13-year high of 87.10 yen per dollar <JPY=> in January, and short-term speculators have been forced to unwind bets that it would revisit that level, helping push the currency even lower.
The dollar rose as high as 97.97 yen <JPY=> according to Reuters data, its highest since mid-November, and was last up 0.12 percent on the day at 97.80 yen.
"It almost feels like 100 (yen) has a magnetism of its own that it's gravitating towards but going into March the risk is increasing that we get a very sharp pullback," said RBC's Cole.
Japanese investors have been net buyers of overseas stocks and bonds [ID:nTKW004305] but Cole said those flows may be reversed as Japanese investors repatriated funds ahead of the fiscal year-end in March. "As you get fiscal year-end window dressing, there is a danger...there's a sudden turn in the flow of capital and that takes us back to the old range around 90."
One-month implied volatility on dollar/yen options has risen to around 18 percent <JPY1MO=> after falling as low as near 16 percent earlier this week.
The euro climbed 0.4 percent to 124.56 yen <EURJPY=>, after touching a seven-week high of 125.17 yen on Wednesday.
Bank of Japan board member Tadao Noda said on Thursday the economy was worsening more than the central bank had forecast in January. [ID:nT100563]
The Australian dollar struck a seven-week high of 63.69 yen <AUDJPY=R>, according to Reuters data, after figures showing Australia's business spending jumped in the fourth quarter. (Editing by Toby Chopra)