* Dollar falls sharply as market focuses on Fed easing
* Aussie rebounds smartly, dollar at 15-year low vs yen
* Uncertainty about Fed policy, global currency talks looms
(Recasts, updates prices, adds comment)
By Steven C. Johnson
NEW YORK, Oct 20 (Reuters) - Investors unloaded the dollar on Wednesday as a report from an influential consultancy said the Federal Reserve planned to buy $500 billion of Treasury debt over six months to invigorate a faltering U.S. economy.
The report accelerated a dollar sell-off that began overnight. The dollar hit a 15-year low beneath 81 yen and the euro rose above $1.39, up more than 1 percent, while the commodity-linked Australian dollar rose nearly 2 percent.
Markets expect the Fed to start pumping money into the U.S. economy as soon as November, a policy known as "quantitative easing," and that has driven the dollar down since September.
The Medley report confirmed comments made on Tuesday by a Fed official that $100 billion a month in bond purchases may be appropriate, providing traders an incentive to push the dollar lower.
"Quantitative easing still hangs over the market, and that's dollar negative, but there is still uncertainty about what it will look like," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
The euro rose 1.1 percent to $1.3960, off a $1.3699 session low. It hit an 8-1/2-month high above $1.41 last week. Traders said selling interest was clustered around $1.4010-20.
Chandler said a rise in German bond yields in anticipation of tighter euro zone policy was also helping the euro, particularly with investors focused on easier U.S. policy.
CitiFX strategists recommended going long the euro at $1.3845 with a $1.5145 target, a level last approached in November 2009.
Sterling rose 0.9 percent to $1.5848, shaking off losses after Bank of England minutes showed a three-way split among policymakers, with one voting for more monetary easing. The dollar hit a 15-year low beneath 81 yen and was last down 0.6 percent at 81.08 yen. Japan spent a bit more than $20 billion last month to weaken the yen, but that failed to keep the dollar from nearing its record low beneath 80 yen.
DOLLAR LOSSES MAY BE LIMITED
Analysts warned, however, that already large speculative bets against the dollar and lingering uncertainty about global currency tensions could limit dollar losses in the short run.
Tuesday's surprise interest rate hike from China, which sparked fear of slower Chinese and global growth, increased risk aversion and briefly pushed the safe-haven dollar higher
Some said China's move and recent assurances from Treasury Secretary Timothy Geithner the United States was not devaluing the dollar for export advantage suggest G20 finance officials may be trying to iron out differences over exchange rate policy ahead of their weekend meeting in South Korea.
Washington wants China to allow more rapid appreciation of the yuan, while Beijing and others complain that dollar weakness is stoking inflation by pushing money into their faster-growing economies.
Scotia Capital strategist Camilla Sutton said the market is "in a bit of a gray area," adding "we think the dollar will end the year weaker, but for now, we're probably going to be in a period of more subdued trading until we get a firmer idea of where policymakers are headed."
German Chancellor Angela Merkel said Wednesday she backed a French proposal to put currency issues on the agenda of a November meeting of G20 heads of state.
"People are buying what floats, and what floats right now is the euro, the Australian dollar," said BNP Paribas strategist Sebastien Galy. "But if the G20 strikes some type of deal on currencies, that could reduce the size of quantitative easing, and less dollar creation will be positive for the dollar."
(Editing by Andrew Hay)