* Yen edges up as interest rate gap expected to narrow
* Rates decisions by RBA, ECB in focus
* Dollar index hits three-year high
By Shinichi Saoshiro
TOKYO, March 3 (Reuters) - The dollar and yen held steady against the euro on Tuesday after the European currency's retreat the previous day as declines in global share prices and increased worries about the financial system fanned aversion to risk.
The dollar index, a gauge of its strength against a basket of six other major currencies, hit a three-year high.
The yen has crawled back after falling sharply last week as gaps in interest rates between Japan and other countries are expected to narrow.
Traders suggested the yen stood to gain a reprieve from last week's fall as investor attention turns to events and data outside of Japan.
"The market focus has shifted from Japan to Europe and the United States," said Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ Trust Bank.
"We saw AIG's results and will also get to see data showing the latest economic conditions in the United States. Europe awaits the ECB's rates decision. These factors and events are not expected to favour their currencies," Inoue said.
Closely watched U.S. data to be released this week includes the non-manufacturing ISM index on Wednesday and non-farm payrolls on Friday.
Market players said the yen was also enjoying a technical rebound after last week's sharp downturn on concerns over the Japanese economy and political malaise, among other factors.
More immediately, traders are focusing on interest rate decisions due from a number of central banks this week.
The Bank of Japan cut its key rate to 0.10 percent from 0.30 percent in December but the gap with other countries has narrowed significantly over the past year as other central banks have steadily cut rates to combat the global economic downturn.
The Reserve Bank of Australia will announce a decision on interest rates at 0330 GMT on Tuesday. The median forecast is for it to cut rates by 25 basis points to a record low 3 percent.
The European Central Bank is expected to cut interest rates to an all-time low of 1.5 percent from the current 2 percent on Thursday.
A Reuters poll showed that the Bank of England is also expected to slash rates by 50 basis points to a record low 0.5 percent when it meets on Thursday.
Analysts said it was still too early to expect a sustained yen bounce.
"Those outside of Japan were mostly bearish on the yen and the yen could again test recent lows," said Masafumi Yamamoto, head of forex strategy Japan at Royal Bank of Scotland.
"That said, yen selling momentum could also subside as the unwinding of yen-long positions and foreign stock buying by Japanese pension funds are unlikely to continue indefinitely," Yamamoto said.
The dollar was flat from late U.S. trade the previous day at 97.46 yen after stooping to 96.99 yen earlier on trading platform EBS. Japanese importers were seen to have scooped up the dollar on dips. The dollar reached a 3-½ month high of 98.72 yen last week.
The euro was little changed at 122.69 yen after touching 121.73 yen on EBS. It poked above 126.00 yen last week to a seven-week high.
The yen also gained against sterling but gave back ground versus the Australian dollar after data showed Australian exports in October-December were surprisingly strong.
The dollar index dipped 0.3 percent to 88.768 after hitting a new three-year high of 89.026.
The U.S. currency was supported the previous day as steep losses on Wall Street and dire financial news including insurer AIG's record loss increased worries about the global credit crisis, boosting the dollar's safe-haven allure.
The euro edged up 0.2 percent to $1.2599, trimming some of the losses suffered in the wake of European Union leaders' rejection of a mass bailout for Eastern Europe, which weighed on the single currency the previous day. (Editing by Michael Watson)