* Aussie hits 14-mth high as RBA raises rates to 3.25 pct
* Dollar index down 0.4 percent at 76.356 <.DXY>
* Dollar hit by report of talks to replace $ in oil trade
* Saudi, Kuwait, UAE, Russia, Algeria deny dollar oil report
(Updates with Aussie extending gains, quotes, changes byline)
By Emelia Sithole-Matarise
LONDON, Oct 6 (Reuters) - The dollar fell on Tuesday on a media report, later denied, that Gulf Arab states were in talks to abandon the U.S. currency in oil trade, while the Australian dollar rose after the central bank raised interest rates.
The U.S. dollar had already been under pressure on expectations the U.S. Federal Reserve would not rush to raise its interest rates and on a growing view that the greenback has become a funding currency for carry trades.
The Reserve Bank of Australia raised its key cash rate by 25 basis points to 3.25 percent, becoming the first Group of 20 central bank to hike as the global financial crisis eases. [ID:nSYD520296]
Analysts said other countries could begin to consider raising rates as the crisis subsided.
A rise in equity and commodity prices on the back of strong U.S. data the previous day also drove investors from the U.S. dollar and into perceived riskier assets.
"Despite the fact that we have the first central bank to come out with a rate hike it's still very much a risk happy environment," said Tom Levinson, a currency strategist at ING in London.
"(With) a central bank tightening rates some might question whether that might not be a bit of a problem for the risk environment and that might help the dollar a bit, but certainly not. Risk seems pretty much on. That combined with that oil story helped the dollar turn weaker."
The Australian dollar rallied to a 14-month high
For a graphic comparing central bank rates, click here: http://graphics.thomsonreuters.com/109/AU_CBRTS1009.gif
The dollar index, which tracks the performance of the greenback versus a basket of six major currencies, was down 0.4 percent at 76.354 <.DXY>, inching back towards a 13-month low of 75.827 hit in late September.
The euro rose 0.5 percent on the day to $1.4724
Traders said options worth 200 million euros with a strike price of $1.4750 were due to expire later in the day.
Options worth almost $1 billion in dollar/yen with strike prices in a range of 88 to 91 yen may limit the dollar's upside.
AUSSIE SURGES
Some traders said the Australian dollar would push higher on expectations of further monetary tightening.
But others said more rate increases were already factored in and the Aussie's upside would probably be limited around $0.90.
While the Fed and the European Central Bank may be in no hurry to raise rates, "other central banks appear more willing to reverse some of the massive monetary accommodation that has been put in place over the past year," said Stuart Bennett, currency strategist at Calyon.
Earlier, the U.S. dollar fell after Britain's Independent newspaper reported Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the dollar with a basket of currencies in oil trading over nine years. [ID:nSYD421795]
But Saudi Arabia's central bank chief said the story was "absolutely incorrect" [ID:nFCC000043] while authorities from Kuwait and United Arab Emirates said they did not see any need for a new currency for oil trade.
Russia had not discussed changing the dollar's role in the global trade of oil, deputy Russian finance minister Dmitry Pankin said. [ID:nFCC000045] Japanese finance minister Hirohisa Fujii also said he was unaware of the report.
(Additional reporting by Tamawa Desai, editing by Nigel Stephenson)