FOREX-U.S. dollar rallies from 8-month low vs yen

* Dollar up on day vs yen, rises briefly above 90 yen

* Japan's Fujii says won't rule out intervention

* Euro falls to two-week low

(Adds comment, U.S. data, updates prices, changes byline, dateline; previous LONDON)

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 29 (Reuters) - The U.S. dollar rebounded against the yen on Tuesday, pulling back from an eight-month low hit the previous day, after Japan's finance minister did not rule out market intervention in the event of the Japanese currency strengthening sharply.

Japanese Finance Minister Hirohisa Fujii on Tuesday said the government would take action if currency moves were irregular. He repeated though that a global competition to devalue a currency was the wrong policy. For story, click on [ID:nT321333].

Gains in the dollar, however, were limited as markets still saw room for the yen to rise.

"The message from the MoF (Japanese finance ministry) is increasingly confusing...We think that rhetoric will increase should there be further yen appreciation," said Camilla Sutton, senior currency strategist, at Scotia Capital in Toronto.

In his initial remarks after being appointed finance minister, Fujii had said he was comfortable with a strong yen given that the government intends to boost domestic consumption. In the past, Japan had intervened in the market to weaken the yen in a move to boost its exports.

Sutton said that in terms of technical charts, Monday's "hammer (on dollar/yen) is the first piece of a bottoming formation, a close above 89.79 would provide confirmation."

In early New York trading, the dollar was up 0.4 percent at 90.03 yen, after briefly recovering above 90 yen. The pair hovered around levels at which options are expected to expire later in the day. Around $250 million in options with a strike price of 90 yen will tick over at the New York cut, IFR reported, as will $200 million each at 90.20 and 90.30.

Market players may still attempt to push the dollar toward January's 13-year low of 87.10 yen and only then think seriously about the possibility of intervention, analysts say, though many say a drop through 85 yen would more likely be needed.

The dollar briefly rose above 90 yen immediately after data showed U.S. single-family home prices rose for a third straight month in July, surpassing forecasts. The S&P/Case-Shiller composite index of 20 metropolitan areas rose 1.6 percent in July from June, more than triple the 0.5 percent estimated rise found in a Reuters poll. [ID:nNYS005445]

The ICE Futures dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, edged up 0.1 percent to 77.116 <.DXY>.

The euro fell 0.3 percent to $1.4568, after dropping to a two-week low around $1.4538, according to Reuters data, as short-term players unwound some long euro positions.

"There has been concern about euro strength given the ECB comments on Monday. So that has been hovering in the market and investors are cautious of taking the euro higher," said Vassili Serebriakov, currency strategist, at Wells Fargo in New York.

European Central Bank President Jean-Claude Trichet said late on Monday he backed the argument for a strong U.S. dollar in foreign exchange markets. [ID:nLS402293] This sentiment was repeated by ECB Governing Council member Ewald Nowotny.

Traders brushed off data showing euro zone economic sentiment improved slightly more than expected in September, to 82.8 from 80.8 in August versus forecasts of 82.2. [nLT517508]

The euro hit a session low against the yen of 130.71 yen , as it was pressured across the board in part due to a 1 percent drop against sterling . The pound rose broadly on the back of a surprising jump in UK sales figures.

Against the dollar, sterling gained 0.6 percent to $1.5979 . (Additional reporting by Naomi Tajitsu in London; Editing by Chizu Nomiyama)