FOREX-Dollar falls on Obama plans; Greek woes hurt euro

* Euro falls to $1.4028, then recovers

* Obama proposes limits on bank risk-taking, dollar falls

* Spreads widen on Greek, Spanish and Portuguese bonds (Adds details, updates prices)

By Vivianne Rodrigues

NEW YORK, Jan 21 (Reuters) - The U.S. dollar fell sharply versus the yen and erased gains against the euro on Thursday after U.S. President Barack Obama announced plans to limit risk taking at certain financial institutions.

Investors feared the plans would limit U.S. bank profits and that helped the euro recover from a nearly six-month low at $1.4028. The yen rose across the board as investors cut risky trades, some of which were funded with the Japanese currency.

Obama's proposals included preventing major banks from owning, sponsoring or investing in hedge funds for their own profit. For more see [ID:nWEN8729].

"The dollar is taking it on the chin after these comments, as the implication is they are negative for bank profitability. Everyone was looking for the dollar to continue rallying but the mood has definitely soured," said Shaun Osborne, senior strategist at TD Securities in Toronto.

In late afternoon trading in New York, the dollar was down about 0.9 percent at 90.40 yen after trading as high as 91.87 yen in the global session. The euro was down 1 percent at 127.40 yen , its lowest since December, but it was little changed at $1.4093 after approaching a six-month low.

Dollar losses were slimmer against the euro, which suffered from worries about Greece's public finances. Greece faces a huge public deficit and its borrowing costs have soared in recent days. Its government said Thursday it would take all necessary measures to rein in its deficits and put the economy back on track.

"This Greek 'tragedy' continues to worsen and there's no real resolution in sight," said Jessica Hoversen, fixed income and currency analyst at MF Global Ltd in Chicago.

Hoversen said that despite the euro's rebound on Thursday, sentiment on the euro zone single currency remains "quite bearish." She noted the currency has traded below key support levels in the past couple of days and said another move lower may bring it to the next support level around $1.4045.

STOCKS, CHINA

U.S. stocks were down sharply on Obama's remarks, which helped dim optimism seen earlier after China said its economy grew 10.7 percent in the fourth quarter. [ID:nTOE60K011]

Analysts, however, said investors are still worried China may try to tighten monetary policy in the months ahead, which could hurt risk appetite.

"The positive impact from the stronger-than-expected growth in China was upset by fears that authorities could begin to tighten policy," said Vassili Serebriakov, a senior currency strategist at Wells Fargo in New York.

"Any suggestion that the engine of the global economy could slow down will be bad for the growth-sensitive and commodity-linked currencies," he added.

Elsewhere, the commodity-linked Australian dollar fell 0.6 percent to $0.9028 as risk aversion hurt commodity prices, while sterling fell 0.5 percent to $1.6200 .

"It's not entirely clear where we go from here," said Osborne. "It's not been a good day for the dollar, for the euro, or for the commodity currencies."

(Additional reporting by Steven C. Johnson and Michael O'Boyle; Editing by James Dalgleish and Diane Craft)