* Dollar hits 2-1/2-month low vs euro
* Fed's rate cut to near zero undermines dollar's appeal
* Greenback within sight of 13-year low vs yen
* BOJ expected to cut rates this week after Fed move
By Satomi Noguchi
TOKYO, Dec 18 (Reuters) - The dollar dropped to a 2-1/2-month low against the euro on Thursday after the Federal Reserve's dramatic interest rate cut further eroded the greenback's relative yield appeal.
The euro extended gains from the previous day above $1.44 as the U.S. central bank slashed rates to virtually zero, further widening the interest rate differential in favour of the euro zone currency.
The euro also strengthed against the pound after comments from a Bank of England official which reinforced expectations the central bank may aggressively cut rates to avoid a prolonged recession.
The dollar stayed near its weakest level in more than 13 years versus the yen after the Fed's bold action brought U.S. interest rates below the Bank of Japan's target for overnight call rate.
"The market move is all about the interest rate differential. The Fed's decision to take quantitative easing measures to combat the recession was faster and bolder than expected, knocking down the dollar against the euro," said Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ Trust Bank.
"Euro/dollar looks close to its near-term peak for now, but it could extend its gains to as high as $1.47 if we hear bad news about the fate of the struggling U.S. automakers," Inoue said.
The euro rose 0.2 percent from late New York trade on Wednesday to $1.4430 after climbing as high as $1.4456 on trading platform EBS, the highest since late September.
In contrast to the policy of aggressive monetary easing pursued by central banks in the United States and Britain, European Central Bank officials have tried to cool expectations that they would make another big interest rate cut in January.
Against the yen, the euro gained 0.6 percent to 126.60 yen, rebounding near Wednesday's high of 126.80 yen.
The euro was up 0.1 percent to 92.97 pence near record highs above 93.00 pence while sterling was nearly flat against the dollar at $1.5508.
Bank of England Deputy Governor Charles Bean said zero interest rates in Britain are a possibility, denting the sterling.
BOJ VERDICT AWAITED
The bold rate cut by the Fed has ratcheted up the pressure on a reluctant Bank of Japan to follow suit this week, with economists saying to hold back would rock Japanese markets and worsen the crisis.
Japanese government officials have pushed the BOJ to take more action and voiced concern about a rising yen. The BOJ ends its two-day policy meeting on Friday.
The dollar rose 0.5 percent to 87.75 yen, but stayed in sight of 87.13 yen hit on Wednesday on EBS, the lowest since mid-1995.
A senior Japanese Ministry of Finance official said that the ministry would take appropriate action as needed in the currency market, fuelling speculation that Japanese authorities may intervene to rein in the yen's rise.
Two-thirds of economists expect the BOJ to cut interest rates this week, and most of them see rates coming down to 0.10 percent from the current 0.30 percent in the overnight call rate, which is now higher than Fed's target of zero to 0.25 percent.
The impact of any BOJ rate cut this week was unclear but it may help to slow the yen's advance, traders said.
(Editing by Sophie Hardach)