* Yen outlook dims, investors wary of further BOJ easing
* U.S. private sector shed 169,000 jobs in November
* Focus on ECB policy meeting, U.S. nonfarm payrolls (Updates prices, adds comment)
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 2 (Reuters) - The dollar on Wednesday posted its best performance against the yen in a month, after Japan's prime minister said the yen's rise cannot be left "as it is," prompting speculation Japan may take additional quantitative easing measures.
In general, quantitative easing undermines a currency's value because it expands money supply to levels that could potentially lead to high inflation.
"The bias toward yen strength that was prevalent the last few weeks has turned, especially after the Bank of Japan announced those quantitative easing measures yesterday," said Ron Simpson, director of FX research at Action Economics in Tampa, Florida.
"Any time you mention QE, that's bad for a currency. So I think the risk for dollar/yen going into the end of the year is definitely to the upside."
The dollar also gained against the euro as the Dow's <.DJI> drop rekindled demand for the greenback as a safe haven. Investors were particularly concerned about the outlook for the financial sector, particularly after Sanford Bernstein put out a less bullish research note on JP Morgan.
Traders were also hesitant to push the euro higher before Thursday's European Central Bank policy meeting, when the bank is expected to announce details of how and when it will remove excess liquidity from the system.
The market's focus, however, remained on the yen in the wake of remarks from Japanese Prime Minister Yukio Hatoyama.
On Wednesday, Hatoyama said it was unclear if the yen's recent rise was temporary but it could not be left "as it is," the Nikkei business newspaper reported on its website.
Japan's Chief Cabinet Secretary Hirofumi Hirano later downplayed Hatoyama's remarks and said they were not a comment about currency intervention.
That, however, did not deter investors from selling the yen.
MARKETS ON ALERT FOR BOJ ACTION
In late afternoon trading, the dollar rose 0.9 percent to 87.32 yen, pulling further away from a 14-year low of 84.82 yen hit on electronic trading platform EBS last week.
The dollar's gain was the currency's largest since Oct. 29, according to Reuters data.
Traders said a break above 87.50 yen would trigger pre-placed buy orders and herald a stronger push higher for the dollar.
The BoJ measures unveiled on Tuesday to combat deflation and keep short-term rates down also prompted investors who had bet on a stronger yen to square positions.
There are "concerns about the risk of further quantitative measures from the Bank of Japan or even intervention, which were exacerbated by the (PM) comments overnight and by the (BoJ's) policy announcement yesterday," said Daniel Katzive, currency strategist at Credit Suisse in New York. "That's made the market a little bit nervous."
The ICE Futures' dollar index, which measures the greenback against a basket of six other major currencies, was up 0.4 percent on the day at 74.636.
The euro rose 0.6 percent to 131.43 yen.
But against the dollar, the euro was down 0.3 percent at $1.5045.
Thursday's ECB meeting is crucial, analysts said, and some believe that, contrary to expectations, the bank may not give details about its exit strategy from quantitative easing. That could weigh on the euro.
"The recent turmoil in Dubai has served as a reminder that ample liquidity remains of the essence to prevent contagion effects," said Rabobank in a research note.
Earlier, a report showed the U.S. economy shed 169,000 private-sector jobs in November. While that was fewer than the 195,000 lost in October, it was higher than an economists' forecast for a loss of 155,000.
Markets are now looking to Friday's release of the U.S. November non-farm payrolls report. Analysts have forecast fewer job losses of 130,000, down from 190,000 cuts in October. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Jan Paschal) ((gertrude.chavez@thomsonreuters.com; +1-646-223-6322; Reuters Messaging: gertrude.chavez.reuters.com@reuters.net))