* Dollar rises versus basket of currencies
* Euro breaks below key technical support
* Fed officials play down surprise move (Adds quote, detail; previous TOKYO)
By Neal Armstrong
LONDON, Feb 19 (Reuters) - The dollar surged across the board on Friday, driving the euro to a nine-month low in the wake of the Federal Reserve's announcement that it would raise the interest rate it charges banks for emergency loans.
The Fed said late on Thursday the discount rate would be increased to 0.75 from 0.50 percent, effective Friday, although it left the benchmark federal funds rate, its main policy tool, unchanged near zero.
Currency markets took the decision as a signal that the U.S. central bank was starting to normalize policy, despite assurances from one Fed policymaker to the contrary.
"Even though this is not an official tightening, it shows that the Fed is at least 'moving'. The Bank of Japan may require more quantitative easing and the ECB cannot change its stance, so that is why the dollar is rallying against the euro and the yen", said Antje Praefcke, currency strategist at Commerzbank.
At 0850 GMT, the dollar was trading up over 1 percent versus a basket of currencies after rallying to an eight- month high of 81.342.
The euro hovered close to a nine-month low of $1.3444 versus the dollar hit after a break of key technical support.
Traders said a 61.8 percent Fibonacci retracement of last year's rally from $1.2455 to $1.5145 had been taken out at $1.3485, with a close below this level today opening the way for further losses.
The dollar has been making gains over recent weeks on the back of positive U.S. economic data, while structural problems in the euro zone have weighed on the single currency, prompting a fall of over 10 percent against the greenback since December.
"We continue to favour the dollar and expect that further improvement in US data combined with persistent euro zone sovereign credit concerns will be dollar-supportive," said analysts at UBS in a note.
Against the yen, the dollar rose to highest levels in a month at 92.10 yen, remaining buoyed around the 92.00 level in European dealing.
Technical analysts were eyeing the 200-day moving average as the next resistance level to watch at 92.30.
TIMING
While the timing surprised the market, Fed Chairman Ben Bernanke had said last week the central bank could soon raise the discount rate. He had stressed, however, that the move would not be akin to tightening monetary policy.
St. Louis Federal Reserve Bank President James Bullard said investors belief in high probability of a rise in the Fed's benchmark rate this year was "overblown" and that the discount rate rise should not be seen as a policy signal.
"The Bullard comments are an attempt to calm the markets because the move came as a bit of a surprise, despite what was said in the Fed minutes this week", said Commerzbank's Praefcke.
The Australian dollar extended losses despite hints by Reserve Bank of Australia Governor Glenn Stevens that further interest rate rises were likely.
The Aussie fell 0.5 percent to $0.8887 and shed 0.7 percent against the yen to 81.63 yen. It also backed off a decade high against the euro set the previous day.
Sterling also remained under pressure, dropping to a nine-month low of $1.5377 versus the dollar as the pound struggled in the wake of Thursday's disappointing public sector finance data. (Additional reporting by Kaori Kaneko; Editing by Mike Peacock)