* Euro falls to $1.4028, but recovers later
* Obama proposes limits on bank risk-taking, dollar falls
* Spreads widen on Greek, Spanish and Portuguese bonds
(Recasts, updates prices, adds comment)
By Steven C. Johnson and Michael O'Boyle
NEW YORK, Jan 21 (Reuters) - The dollar fell sharply against the yen and relinquished gains against the euro on Thursday after President Barack Obama announced plans to limit risk taking at certain financial institutions.
Investors saw risks 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.
"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.
The dollar was down 0.9 percent at 90.42 yen after earlier trading as high as 91.87 yen in the global session. The euro was down 0.8 percent at 127.68 yen, its lowest level since December. But it rose to $1.4118, after earlier approaching a six-month low.
Dollar losses were slimmer against the euro, which suffered from worries about Greece's public finances. Greece is facing a huge public deficit and its borrowing costs have soared in recent days. The government said Thursday it would take all necessary measures to rein in its deficits and put the economy back on track.
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.
But analysts said investors are still worried China may try to tighten policy in the months ahead, which could hurt risk appetite.
"There are two factors the market is watching, one being the rising risk of credit collapse in China, the second being the continued deterioration of conditions in Greece," said BNY Mellon strategist Michael Woolfolk.
Elsewhere, the commodity-linked Australian dollar fell 0.4 percent to $0.9055 as risk aversion hurt commodity prices, while sterling fell 0.4 percent to $1.6216.
"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."
(editing by Andrew Hay)