(Updates prices, adds quotes)
By Naomi Tajitsu
LONDON, Jan 23 (Reuters) - Sterling hit a fresh 23-year low against the dollar on Friday after dismal economic data confirmed the UK is in recession, while extreme risk aversion pushed the dollar to a six-week high against the euro.
A tumble in European shares to a six-year low prompted investors to dump risky assets, which boosted the dollar to its highest level against a basket of currencies since early December and triggered another dramatic, broad rally in the yen.
"In an environment where risk aversion has remained elevated inversely to the slide in equity markets, we're seeing the dollar and the yen continue to be the net beneficiaries, while sterling and the euro are seeing some pretty sizeable shifts," said Jeremy Stretch, strategist at Rabobank in London.
Sterling tumbled to a low at $1.3500, its weakest since September 1985, after data showed the UK economy contracted by 1.5 percent in the fourth quarter, far more than analysts had expected..
"Today's numbers have simply compounded what has been a pretty horrendous week for UK Plc," said Stretch at Rabobank.
Royal Bank of Scotland's announcement of massive 2008 losses on Monday kicked off sterling's latest plunge, which deepened on speculation that the UK government plan announced on Monday may not be enough to rescue the financial sector.
Tumbling bank shares, a string of weak economic data and the possibility of quantitative easing by the Bank of England kept intense selling pressure on sterling. It is on track to post a weekly fall of 8.5 percent against the dollar, close to its steep decline at the time of it's exit from the European Exchange Rate Mechanism in 1992.
The dismal view of the UK helped to raise concerns about the global economy, keeping risk aversion high and pushing the euro as low as $1.2766, its weakest since early December.
A fall in European shares to 742.53, its lowest since April 2003, helped to keep the euro under selling pressure. It has has fallen nearly 4 percent against the dollar this week.
The euro has been affected by credit downgrades to three euro zone countries, Spain, Greece and Portugal, which has tarnished the appeal of the region's assets with some investors.
The single currency took little encouragement from polls on Friday showing the euro zone manufacturing and services sector contracted at a slightly slower pace in January, since they remain deep in recessionary territory.
The dollar's gains versus sterling and the euro pushed the U.S currency's trade-weighted index up around 1.5 percent to 86.809, its highest in nearly seven weeks.
The yen jumped as investors shed risky assets, pushing the low-yielding Japanese currency to a record high 118.87 yen, and pushed the pound down 11 percent so far this week.
The euro fell more than 2 percent to 112.51 yen edging closer to a seven-year trough.
The dollar slipped 0.3 percent to 88.44 yen, after sliding as low as 88.00 yen according to Reuters data. Earlier in the week, the pair fell to 87.10 yen, its lowest level since mid-1995.
Risk aversion also stung the higher-yielding Australian and New Zealand dollars, which each fell around 2 percent against the dollar. The Australian currency fell as low as $0.6418, its weakest in seven weeks.
Also helping to support the dollar were comments from U.S. Treasury Secretary nominee Timothy Geithner who said a strong dollar is in the United States' interest.
His remarks came on Thursday when he won the Senate Finance Committee's backing to head the U.S. Treasury.
Given the yen's dramatic gains this week market players were on the lookout for more comments from Japanese authorities about possible currency intervention to stem the yen's rise.
Japanese Finance Minister Shoichi Nakagawa on Friday said that economic problems in the United States and Europe were affecting Japan's stock and currency markets.
Currency levels have come under close scrutiny this week, with France's finance minister on Wednesday complaining against sterling weakness against the euro. The two currencies are edging closer to parity.
Concerns are also growing about the possibility that the Swiss National Bank could intervene to weaken the Swiss currency, which, like the yen, has gained as investors seek safer assets.
"If euro/Swiss franc moves into the 1.43 franc area the SNB will become more vocal on this issue," BNP Paribas currency strategist Ian Stannard said.
The euro was trading down 0.4 percent at 1.4934 francs.