* Euro rally loses steam vs dollar
* Yen tries upside but rally quickly falters
* Market pauses to assess how far dollar correction can go
By Charlotte Cooper
TOKYO, June 17 (Reuters) - A rally in the euro lost steam on Wednesday and major currencies struggled for direction as the market tried to decide whether a pause in the dollar's medium-term slide was over or had a little further to run.
The dollar has fallen steeply against major currencies such as the euro and Australian dollar this year, with investors unwinding safe-haven dollar positions as the worst of the economic crisis faded and as questions arose over its suitability as the reserve currency.
Both it and the yen have clawed back some lost ground this month as investors have paused to assess whether rallies in riskier assets including shares have got ahead of themselves.
But the greenback fell again on Tuesday when Russia suggested the need for a reserve currency other than the dollar.
Analysts said the fact that emerging economy leaders meeting in Russia then avoided the reserve status issue in a statement after their summit caused the selling to peter out.
"At the end there was no strong comment to play down the role of the dollar," said Masafumi Yamamoto, head of FX strategy Japan at Royal Bank of Scotland in Tokyo.
The leaders of Brazil, Russia, India and China instead ended their meeting demanding a greater say in the global financial system.
The euro edged up 0.2 percent from late U.S. levels to $1.3860 after earlier veering towards a one-month low of $1.3747 set on Tuesday. It has gained 11 percent on the dollar since March.
Asian stock markets were largely negative, with investors doubting how fast the U.S. recession is easing after a mixed set of economic indicators, and offered currencies no direction.
"The global financial markets are in correction mode," Yamamoto said.
Traders and analysts said currency flows seemed to be driven by short-term players, making the market choppy, but the dollar and the yen still had room to strengthen a bit more.
"The dollar can continue a bit higher but overall the medium-term trend lower is still intact," a senior trader at a European bank in Hong Kong said.
"It's thin and erratic and definitely there's a bit of risk of aversion in the market -- nothing like we saw last year but some of the yen crosses are quite heavy."
The yen has also rebounded as investor caution has resurfaced. It drove the dollar to a two-week low below 96.00 yen and the Australian dollar to a three-week low below 76.00 yen before running into selling which erased most of its gains.
It later eased 0.2 percent to 96.53 per dollar and was flat at 76.46 per Aussie.
Traders said talk that Japanese investors may repatriate funds from euro zone bond redemptions had helped push the euro down versus the yen this week, with 15.6 billion euros ($21.6 billion) of redemptions and 2.1 billion euros of coupon payments falling due.
The euro rose 0.3 percent to 133.90 yen after dipping to 132.55, but has fallen 3 percent against the yen since Friday.
Traders also cautioned about yen-selling related to Japanese investment trusts, which tend to attract funds in June and July when people receive bonuses.
A batch of trusts investing overseas are expected to be launched towards the end of this month, although traders questioned how much will flow into them as many people face bonus cuts this year. (Editing by Michael Watson)