* Yen falls across board, dollar at 3-month high
* Pound, euro, Aussie dollar gain as yen longs cleared out
* But market cautious of chasing dollar/yen much higher
By Charlotte Cooper
TOKYO, Feb 24 (Reuters) - The yen fell across the board on Tuesday, sending the dollar to a three-month high, as investors who had bet the Japanese currency would push back up towards recent peaks were forced to cut loss-making positions.
The yen, which until recently tended to gain as a safety bid when stock markets tumbled, dropped against the pound, euro and Australian dollar even as Japan's Nikkei share average fell, edging close to its lowest levels in 26 years.
That stocks-fall/yen-rise relationship has ruptured in the past week as a deepening recession in Japan and political uncertainty dimmed the yen's appeal and as demand for the currency resulting from derivatives unwinding has ebbed.
"There is lots of liquidation of speculators' long yen positions which had been built," Tomoko Fujii, senior currency strategist at Bank of America Securities-Merril Lynch, said.
The dollar rose 0.7 percent to 95.28 yen, triggering buy orders around 94.60 and 95 and tripping up traders who had expected the yen to gain as Japanese investors repatriated funds ahead of the fiscal year end in March.
"So far there was no obvious large flow of repatriation," said Masafumi Yamamoto, head of FX strategy Japan at Royal Bank of Scotland.
Capital flow data shows foreigners have been net sellers of Japanese stocks and bonds in early February, while Japanese investors have bought stocks and bonds abroad.
Traders said positive technical signals had also prompted model funds to buy other currencies against the yen in recent days, while derivatives have been unwinding.
The euro climbed nearly 1 percent to 121.28 yen, sterling rose 1 percent to 138.37 yen and the Australian dollar gained 1.2 percent to 61.32 yen.
All three have hit either record or multi-year lows against the Japanese currency in the past four months but then edged steadily higher in February.
"The yen crosses are well supported near term. But I'm not sure if dollar/yen will continue to rise towards 100 as there is no yield gap between Japan and other countries," Yamamoto said.
STOCKS AND THE YEN
Tokyo's Nikkei share average fell 1.46 percent, in sight of a 26-year trough below 7,000, after Wall Street slumped to a 12-year low overnight.
The Nikkei's correlation with the dollar/yen has turned negative on a 90-day rolling basis after being strongly positive at the end of last year when the dollar and the Nikkei were plunging in tandem.
The divergence has shown up as the yen's recent fall has failed to boost shares of Japanese exporters in a way a lower exchange rate has done in the past.
Finance Minister Kaoru Yosano said the government was looking at stock buying and other methods to support the share market..
With concerns about the global economic crisis and financial stability never far away, investors also awaited more developments with Citigroup, after a report on Monday that the government could take a stake of up to 40 percent, and with American International Group Inc.
AIG, which was rescued twice last year by the U.S. government, is in talks with authorities for more aid as it looks to post its largest-ever quarterly loss, a source familiar with the matter said.
The U.S. Treasury Department, Federal Reserve and three other federal agencies jointly said on Monday they would initiate a programme on Wednesday to assess large U.S. banks' capital needs and determine whether a bigger buffer is warranted.
The euro was up 0.2 percent at $1.2718, but well below a 12-day peak of $1.2992 hit on EBS the previous day.
Traders say few were willing to chase it higher after comments from European Central Bank President Jean-Claude Trichet that the euro-zone financial system is under severe strain. (Additional reporting by Rika Otsuka) (Editing by Kazunori Takada)