(Corrects eight paragraph to say pound down 2.7 percent, not 0.7)
* Pound plunges to 7-yr low vs dollar, euro at 6-week low
* Dollar index hits 6-week high; yen gains on lower stocks
* UK banking woes weigh on pound; EZ econ worries hurt euro
(Adds quotes; changes byline, dateline, previous TOYKO)
By Jessica Mortimer
LONDON, Jan 20 (Reuters) - The pound plunged to a seven-year low against the dollar on Tuesday on banking sector woes, while the euro dropped to a six-week low against the U.S. currency, weighed by worries about the state of the euro zone economy.
The pound tumbled after UK bank RBS announced the biggest loss in British corporate history on Monday and the UK announced a second series of measures to bail out the banking sector.
Fears about the outlook for the euro zone economy also weighed on the euro, pushing it to a six-week low against the dollar below $1.30 after the European Commission issued a grim 2009 forecast and Standard and Poor's cut Spain's debt ratings.
European shares edged lower, helping the yen gain sharply as investors remained wary of taking on risk.
Focus on Tuesday will centre on Barack Obama's inauguration as U.S. president, amid hopes that he will implement swift action that will help the U.S. economy, which has helped to bolster dollar sentiment.
Along with massive falls in the pound and the euro, this has helped pushed the dollar to a six-week high against a basket of currencies.
"The Obama euphoria is dollar positive, and the biggest casualty of this is sterling because by contrast sterling sentiment is really bad," Commerzbank currency strategist Antje Praefcke said.
At 0830 GMT, sterling was 2.7 percent down against the dollar at $1.4076, just above an earlier trough of $1.4057, its weakest level since early 2002, while the euro fell 1.2 percent to $1.2950, having hit a six-week low of $1.2923.
The trade-weighted dollar index was up 0.9 percent, hitting a six-week high of 85.993.
The yen also rose, with the dollar down 0.1 percent at 90.57 yen and the euro down 1.4 percent at 117.20 yen.
The European Commission on Monday forecast the euro zone will contract by 1.9 percent in 2009, while S&P's downgrade on Spain sparked fears that cuts to other euro zone countries' debt ratings will follow after a downgrade for Greece last week.
"The ailing banking sector in the UK coupled with weak economic conditions in Europe has accelerated downward pressure on currencies in Europe," said Saburo Matsumoto, senior manager at Sumitomo Trust & Banking.
The German ZEW economic sentiment index for January due at 1000 GMT is expected to show a slight improvement after a huge fall in December, but the reading is expected to remain weak and could weigh further on the single currency, analysts said.
Investors will also watch UK inflation data at 0930 GMT, which is expected to reveal a large fall in prices in December.
Elsewhere, the New Zealand dollar slid over 2 percent against the dollar after a sharper-than-expected fall in inflation reinforced expectations of deeper interest rate cuts next week. (Reporting by Jessica Mortimer, editing by Mike Peacock)