* Greece hurts euro; dollar, yen gain on risk aversion
* Yen gains capped after Japan lawmaker talks intervention
* Sterling hit by political uncertainty; Aussie falls (Recasts, adds quotes, update prices; changes dateline, previous LONDON and byline)
NEW YORK, April 16 (Reuters) - The dollar gained against the euro on Friday on concerns about how Greece will service its debt, with the dollar and the yen advancing as investors cut positions in riskier currencies.
The Japanese currency pared gains, however, after a lawmaker from Japan's ruling party said monetary easing and intervention to weaken the yen were needed to beat deflation.
Greece asked on Thursday asked for talks with European authorities and the International Monetary Fund, a step toward Athens obtaining support via an aid plan agreed last weekend.
Concerns remain about how the deal will work in practice, however, and the premium demanded to buy Greek government bonds rather than German bonds rose further.
"After yesterday's letter sent to the EU and the IMF, the market took that as a sign Greece is very close to where they will need to ask for financial assistance," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
In early New York trade, the euro was down 0.6 percent against the dollar at $1.3497, just off a one-week low of $1.3490.
The $1.3500 level was seen as key because it marks the peak reached last Friday before the single currency gapped higher after the weekend in response to the agreement on terms of the Greek bailout deal.
"We think that the euro will remain under pressure because we have serious concerns about whether the euro can still be considered a hard currency," said Morgan Stanley Global Currency Research Team in a note to clients.
Gains in the dollar were capped however, particularly after U.S. two-year Treasury yields fell below 1 percent for the first time in three weeks.
"U.S. yields below 1 percent is likely to feed through into the idea that the Fed will retain its stance that rates will remain low for some time," said Tom Levinson, currency strategist at ING in London.
Top U.S. Federal Reserve officials have showed little urgency to softening the central bank's commitment to hold rates low for a long time, suggesting the Fed will repeat the pledge when it meets later this month.
YEN PARES GAINS
Against the yen, the euro fell 0.9 percent to 125.13 yen. The dollar fell 0.3 percent against the yen to 92.72 yen but trading had been volatile after the Japanese lawmaker's comments.
"(The comments) have got the market a bit jittery. It looks like we could be moving back to the old road of needing to weaken the yen," said David Bloom, global head of currency research at HSBC in London.
Traders said stop loss orders for the dollar were thought to be placed from 92.50 yen down to 92.20 yen.
A Commerce Department report showing U.S. housing starts rose more than expected in March to their highest level since November 2008 and permits to build new homes scaled a 17- month high had only momentary impact on foreign exchange investors. The dollar briefly pared losses against the yen before returning to lower levels.
Sterling fell on concerns a May 6 UK election may result in no one party winning a majority, as polls showed the heads of the two main parties were beaten in a TV debate by the leader of the third party, the Liberal Democrats.
Sterling fell 0.6 percent against the dollar to $1.5415, while risk aversion pushed the higher-yielding Australian dollar down 0.6 percent to $0.9295. (Reporting by Nick Olivari; Editing by Theodore d'Afflisio)