* Dollar weak after Fed cut, hits 2 1/2-mth low vs euro
* German Ifo index falls more than expected
* Markets await BOJ rate decision
(Changes dateline, byline, adds comment, updates throughout; previous TOKYO)
By Naomi Tajitsu
LONDON, Dec 18 (Reuters) - The dollar hit a 2 1/2-month low against the euro on Thursday and hovered near its weakest versus the yen since 1995 as investors dumped the U.S. currency in further fallout from the dramatic moves by the Federal Reserve this week.
Weak figures on the German business climate briefly prompted the euro to trim some gains, as it added to the view that the euro zone economy is weakening further and may require more aggressive rate cuts.
But overall, the dollar extended losses, helping the euro to add to a roughly 7.5 percent rally so far this week, after the Fed slashed its benchmark rate to virtually zero earlier in the week.
It also said it would employ "all available tools" to pull the economy out of a recession, opening the door for the central bank to take on a quantitative easing policy, where it could expand purchases of debt issued and guaranteed by government-sponsored mortgage agencies and buy Treasuries.
"The dollar ... is vulnerable because of what they're doing in terms of policy and the potential for quantitative easing in the U.S.," said Robert Minikin, senior currency strategist at Standard Chartered in London.
"The dollar remains very much under selling pressure, and we believe that will continue in coming days."
He added that the euro was supported on the view that the currency, with its 2.5 percent rate, may maintain its relative yield advantage against the dollar.
In contrast to the aggressive monetary easing pursued by central banks in the U.S. and other countries like the UK, European Central Bank officials have tried to cool expectations that they will keep cutting rates aggressively.
Given intense interest in global monetary policy, investors awaited a rate decision by the Bank of Japan on Friday. The BOJ is poised to cut rates from 0.3 percent to close to zero to help the economy, which has been hit hard by a fall in global demand.
The Fed's bold rate cut has ratcheted up the pressure on a reluctant Bank of Japan to follow suit with a rate cut this week. Two-thirds of economists polled by Reuters this week expect the Japanese central bank to cut rates on Friday.
DOLLAR PRESSURE
Early on Thursday, the euro climbed as high as $1.4495 according to electronic trading system EBS, its highest level since late September. By 0922 GMT, it traded 0.3 percent higher at $1.4445.
Broad losses pushed the dollar to 78.210 against a basket of currencies, its weakest in 2 1/2 months.
The dollar rose 0.8 percent to 87.99 yen, but remained trapped near 87.13 yen hit on EBS on Wednesday for the first time in more than 13 years.
Dramatic gains in the yen in past weeks prompted Japanese Finance Minister Shoichi Nakagawa to say on Thursday that while he wouldn't comment on whether the ministry would intervene to rein in the yen's gains, it had the options to do so.
Recent comments by Japanese officials has kept speculation intact that authorities may intervene to reign in the currency's rise.
The dollar climbed against sterling, which pulled away from a five-week high hit in the previous session to $1.5365, down half a percent on the day.
The view that UK rates will continue to fall aggressively stung the pound, pushing it to a record low against the euro at 94.01 pence.
The Ifo institute's index on the German business climate fell to 82.6 in December from 85.8 in November. The reading was lower than expectations for 84.0 and bolstered the view that the euro zone economy is slowing rapidly.
Analysts said they were worried about the pace of decline in the index, but added that ongoing deterioration in the region's economy may not be enough to prompt another big rate cut any time soon by the ECB, which has slashed rates by 175 basis points since October.
"The ECB is reluctant to bring interest rates to zero and wants to wait in January, after cutting rates sharply in the past few months."
(Additional reporting by Naomi Tajitsu; Editing by Toby Chopra)