* Dollar index falls, technicals suggest more selling
* Euro rises sharply; sterling, yen hit multimonth highs
* Sluggish U.S. growth weighing on greenback, U.S. yields (Updates prices, adds comment, U.S. data, changes byline, dateline, previous LONDON)
By Steven C. Johnson
NEW YORK, Aug 3 (Reuters) - The dollar tumbled on Tuesday, plunging in tandem with short-dated U.S. bond yields and hitting multimonth troughs against the euro, yen and sterling on mounting fears that a U.S. economic recovery was faltering.
The euro hit a three-month high of $1.3261, according to Reuters data, while the dollar fell below 86 yen, its weakest showing since November.
The dollar index, which measures the greenback against the euro, yen and four other currencies, fell below its 200-day moving average for the first time since January, which analysts said may signal more selling ahead. It was last down 0.3 percent at 80.680.
Also stinging the dollar was the two-year U.S. Treasury yield, which fell to a record low of 0.534 percent.
On Monday, Federal Reserve chief Ben Bernanke acknowledged the economy had yet to fully recover and that benchmark U.S. interest rates must remain low.
Investors were further unnerved when the Wall Street Journal reported Tuesday that the Fed -- the U.S. central bank -- may consider pumping more money into the system by purchasing new mortgage or Treasury debt.
The Fed ended a massive bond-buying program four months ago, and analysts said any change would suggest policymakers were worried about the economic outlook.
"People are beginning to accept that the U.S. economy is coming back to earth and, as far as growth goes, may be playing second fiddle to other economies," said Andrew Wilkinson, analyst at Interactive Brokers Group in Greenwich, Connecticut. "That's driven bond yields down and is sapping the dollar."
The euro traded 0.4 percent higher at $1.3230. In June, fear that debt crises in Greece, Spain and elsewhere were threatening the future of the euro zone pushed the euro below $1.19, its lowest level since 2006.
But with euro zone economic data holding firm and stress tests showing most European banks with sovereign debt exposure remain in good health, attention has turned to the dollar and signs of a slowing U.S. economy.
"We've broken levels that should have held if we were to be trending south in euro/dollar," said Dag Muller, technical strategist at SEB in Stockholm, adding he saw a climb to $1.33 in the near term.
Traders said if the euro can end the week above $1.3350, a level last seen before fears about Greece accelerated, markets would see that as a bullish sign that could put $1.3510 in range, the 50 percent retracement of the euro's November-to-June swoon.
Against the yen, the dollar fell 0.6 percent to 85.94 yen after hitting a eight-month low.
Japanese Finance Minister Yoshihiko Noda said on Tuesday that excessive, disorderly moves in the foreign exchange market were undesirable and that too strong a yen hurts exports and households, while Prime Minister Naoto Kan said he was watching economic moves.
Sterling hit a fresh six-month peak at $1.5968 and was last up 0.4 percent at $1.5940. The Australian dollar fell 0.1 percent to $0.9118, after the central bank there held the benchmark interest rate at 4.5 percent as expected.
Marc Chandler, senior strategist at Brown Brothers Harriman in New York, said the market may be on the verge of over-selling the dollar the same way it did the euro in June.
"The risk that the pendulum is swinging too far the other direction is increasing," he said. "But to be clear, there still does not appear much technical or fundamental incentive to pick a bottom to the dollar." (Additional reporting by Naomi Tajitsu in London; Editing by James Dalgleish)