* Dollar gains broadly, sterling tumbles on bank sector woes
* Euro drops to 6-week low against dollar
* Kiwi slides on soft inflation data
By Satomi Noguchi
TOKYO, Jan 20 (Reuters) - The dollar gained against a basket of currencies on Tuesday as the pound extended losses to a seven-year low versus the greenback, after Royal Bank of Scotland recorded the biggest loss in British corporate history and revived concerns about the global banking sector.
Sterling also hit a record low against the yen after the impact of Britain's rescue plans quickly dissipated in the face of tumbling European shares.
Tokyo stocks fell 2.3 percent on renewed risk aversion, giving up gains made since late last week ahead of Tuesday's inauguration of Barack Obama as U.S. president, and prompted investors to seek safety in the dollar and the yen.
The euro also extended its fall after having dropped sharply on Monday on a ratings downgrade of Spain by rating agency Standard & Poor's and grim economic forecasts from the European Commission.
"The global economy is deteriorating much faster than anticipated. As a result, losses in the banking sector are expanding and we cannot see a bottom to it," said a trader at a Japanese bank.
"The market is well aware of policy-makers' determination to avert more collapses of financial firms, but a guaranteed rescue is impossible," the trader said.
The dollar index, a gauge of the greenback's performance against a basket of six major currencies, gained 0.4 percent to 85.511.
The pound fell as low as $1.4132, its lowest since March 2002. It recovered a tad to $1.4275, but was down 1.0 percent from late overseas trade on Monday, when U.S. financial markets were closed for a holiday.
Sterling tumbled 1.6 percent to 128.94 yen, after hitting record low of 127.47 yen.
The euro fell 0.4 percent to $1.3018 after touching a six-week low of $1.2974 on trading platform EBS.
The euro fell 0.7 percent to 117.65 yen.
Traders said sterling and the euro will likely fall further as Dow futures pointed to further declines on Wall Street, an outlook likely to also push down European shares, sapping risk appetite.
Economic data due in Europe such as the German ZEW economic sentiment index for January may further weigh on the European single currency, which could drag down sterling, they added.
German economic sentiment probably inched up to minus 44.0 in January from minus 45.2 in December but weak data likely kept the mood subdued, a Reuters poll showed.
"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.
YEN-SELLING FLOWS MAY SLOW
The yen drew some support from news that Japan's Kokusai Asset Management cut a monthly dividend for its flagship mutual fund for the first time in eight years, prompting traders to believe yen-selling flows from Japanese retail investors could further slow in the coming months.
The Kokusai Global Sovereign Open fund invests in government bonds with high credit ratings and is the world's second-largest bond fund after PIMCO Total Return Fund of the U.S.
"A cut in dividends or investment returns adds to the pain mutual fund investors are already feeling from the yen's broad strength," said a senior trader at a major Japanese bank.
"The news is a supporting factor for those who see further yen rises," the trader said.
The dollar fell 0.3 percent to 90.36 yen.
The New Zealand dollar slid against the dollar and the yen on a sharper-than-expected fall in a fourth-quarter price index that reinforced expectations of deeper interest rate cuts next week.
The kiwi was also under pressure after S&P cut Spain's debt rating, prompting fears that other countries facing a severe deterioration in public finances amid the floundering global economy including New Zealand could prove to be next after Greece's downgrade last week.
The kiwi fell 0.6 percent to $0.5337 and dropped 1.4 percent against the yen to 48.23 yen. (Additional reporting by Kaori Kaneko; Editing by Edwina Gibbs)