* Dollar loses 0.9 percent vs yen on dovish Bernanke
* Euro pares gains after weak German industrial production
* Sterling slides before UK pre-budget report on Weds
(Updates prices, adds quotes; changes byline)
By Jessica Mortimer
LONDON, Dec 8 (Reuters) - The dollar fell against the yen and struggled against the euro after Federal Reserve Chairman Ben Bernanke cooled speculation of an early rise in U.S. interest rates.
Bernanke said the U.S. economy still faced headwinds and unemployment could stay high for some time, playing down the impact of Friday's stronger-than-expected jobs report and helping send yields on shorter-dated Treasuries lower.
The U.S. data, which showed fewer jobs were lost in November than expected, had raised some expectations the Fed may start to normalise ultra-easy monetary policy earlier than expected and triggered renewed buying of the dollar which has now faded.
The euro pared some of its gains against the dollar, however, after data showed German industrial output unexpectedly fell 1.8 percent month-on-month in October as production of capital goods dropped sharply.
"Bernanke has been the principal driver of the dollar. It is all down to U.S. interest rate expectations," said Adam Cole, global head of FX strategy at RBC Capital Markets.
He added that the yen was the main gainer because Friday's jobs data had sparked talk that the yen would return to being the funding currency of choice.
"The yen was the biggest loser after the payrolls data and it is the biggest winner today," Cole said.
The dollar has taken a beating for much of the year on the view that rates in the United States will stay low while those elsewhere rise. This would increase the yield advantage of other currencies against the dollar.
By 1156 GMT, the U.S. currency was down 0.9 percent against the yen at 88.71 yen, while the euro also fell 1 percent to 131.30 yen.
Concerns over the fiscal health of some euro zone countries also weighed on the euro after rating agency Standard & Poor's said in a report that Greek banks faced the highest risks in western Europe. This sent the premium investors demand to hold Greek government debt to its highest since April.
The dollar index edged up 0.1 percent to 75.829, while the euro was down 0.1 percent at $1.4805, having earlier risen to around $1.4866.
The U.S. currency gained some ground against the euro early in Europe as a trickle of dollar short covering continued in the wake of Friday's U.S. jobs data, but the gains were short-lived.
"Bernanke's speech was dovish, and he suggested there would not be an immediate rate rise," said Marcus Hettinger, global currency strategist at Credit Suisse in Zurich.
"There are more short dollar positions to cover, but we still see the currency weaken."
New York Federal Reserve President William Dudley also said on Monday the U.S. economy was still weak and reiterated that rates would remain low for an extended period.
Earlier, European Central Bank President Jean-Claude Trichet said the euro zone faced a bumpy road to recovery.
Trichet said on Monday the ECB could pause the process of withdrawing emergency support measures for the economy if needed.
Elsewhere, sterling fell broadly on concerns about UK fiscal health before the government's pre-budget report on Wednesday, which is expected to highlight the state of Britain's finances.
Sterling fell 0.9 percent to $1.6303, while the euro rose 0.7 percent to 90.76 pence.
(Reporting by Jessica Mortimer, editing by Nigel Stephenson)