* Sterling hits 7-year low vs dollar on banking sector woes
* Euro drops to 6-week low against dollar
* Kiwi slides on soft inflation data
By Satomi Noguchi
TOKYO, Jan 20 (Reuters) - The dollar gained against a basket of currencies on Tuesday as the pound extended losses to a seven-year low versus the greenback, after Royal Bank of Scotland recorded the biggest loss in British corporate history and revived concerns about the global banking sector.
Sterling also threatened 14-year lows against the yen after the impact of Britain's rescue plans quickly dissipated in the face of tumbling European shares.
Tokyo stocks fell 3 percent on renewed risk aversion, giving up gains made since late last week ahead of Tuesday's inauguration of Barack Obama as U.S. president, and prompted investors to seek safety in the dollar and the yen.
The euro also extended its fall after having dropped sharply on Monday on a ratings downgrade of Spain by rating agency Standard & Poor's and grim economic forecasts from the European Commission.
"The global economy is deteriorating much faster than anticipated. As a result, losses in the banking sector are expanding and we cannot see a bottom to it," said a trader at a Japanese bank.
"The market is well aware of policy-makers' determination to avert more collapses of financial firms, but a guaranteed rescue is impossible," the trader said.
The dollar index, a gauge of the greenback's performance against a basket of six major currencies, gained 0.3 percent to 85.402.
The pound fell as low as $1.4247, its lowest since March 2002. It recovered a tad to $1.4270, but was down 0.9 percent from late overseas trade on Monday, when U.S. financial markets were closed for a holiday.
Sterling tumbled 1.6 percent to 128.90 yen, threatening 14-year lows below 128.77 yen hit earlier this month.
The euro fell 0.3 percent to $1.3026 after touching a six-week low of $1.2988 on trading platform EBS.
The euro fell 0.7 percent to 117.63 yen.
YEN-SELLING FLOWS MAY SLOW
The yen drew some support from news that Japan's Kokusai Asset Management cut a monthly dividend for its flagship mutual fund for the first time in eight years, prompting traders to believe yen-selling flows from Japanese retail investors could further slow in the coming months.
The Kokusai Global Sovereign Open fund invests in government bonds with high credit ratings and is the world's second-largest bond fund after PIMCO Total Return Fund of the U.S.
"A cut in dividends or investment returns adds to the pain mutual fund investors are already feeling from the yen's broad strength," said a senior trader at a major Japanese bank.
"The news is a supporting factor for those who see further yen rises," the trader said.
The dollar fell 0.3 percent to 90.32 yen.
The New Zealand dollar slid against the dollar and the yen on a sharper-than-expected fall in a fourth-quarter price index that reinforced expectations of deeper interest rate cuts next week.
The kiwi was also under pressure after S&P cut Spain's debt rating, prompting fears that other countries facing a severe deterioration in public finances amid the floundering global economy including New Zealand could prove to be next after Greece's downgrade last week.
The kiwi fell 0.6 percent to $0.5335 and dropped 1.5 percent against the yen to 48.15 yen. (Editing by Chris Gallagher)