* Euro, sterling extends gains vs yen
* Risk appetite improves as shares rise
* Japan govt says to provide public funds to firms
By Masayuki Kitano
TOKYO, Jan 27 (Reuters) - The yen fell against the euro and sterling on Tuesday as Tokyo shares rose and after the Japanese government said it would offer public funds to companies whose capital is seriously hurt by the financial crisis.
The yen had fallen on Monday after British bank Barclays said it would report a 2008 pretax profit and U.S. data showed a rise in home sales, giving a boost to investors' risk appetite.
The yen extended its losses against the euro and sterling on Tuesday after the Japanese government said it would provide public funds to firms facing difficulty in fund-raising due to market turmoil.
The yen often take its cue from perceived swings in investors' risk appetite, and has tended to fall against higher-yielding currencies when such risk tolerance increases.
But market players said the latest fall in the yen may have been exacerbated by position unwinding and played down the impact of the government's offer of public funds for firms.
"It's hard to say whether market players will start taking risks and sell the yen because of this," said Tohru Sasaki, chief foreign exchange strategist for JPMorgan Chase Bank in Tokyo.
"The yen had already been sold ahead of time and stocks had risen, so it's hard to tell just how much of this move stemmed from the news and how much of it was stop-loss position unwinding," Sasaki said.
The euro was up 0.9 percent at 118.47 yen on trading platform EBS, having climbed to 118.91 yen earlier.
The euro has rebounded against the yen after hitting a seven-year low of 112.08 yen last week.
Sterling climbed 1 percent to 125.68, having rebounded from last week's record low of 118.80 yen.
Amid the yen's broad weakness on Tuesday, the dollar rose 0.5 percent to 89.53 yen.
EURO, STERLING OUTLOOK MURKY
Sterling also rose against the dollar, climbing 0.3 percent to $1.4037 and pulling away from a 23-year low of $1.3500 hit late last week after data showed that Britain's economy shrank at its fastest pace since 1980.
The yen could fall further against sterling and the euro in the near term, especially if global stock markets rise and point to further improvement in investors' risk appetite, traders said.
But the euro and sterling were unlikely to see a sustained rally at this point, despite the previous day's rally, they said.
"What took place was probably a temporary unwinding of positions that were tilted toward selling European currencies," said Yuji Matsuura, joint general manager for Aozora Bank's forex & derivatives trading group.
One key for the euro later on Tuesday will be Germany's Ifo monthly business climate index, traders said.
Against the dollar, the euro rose 0.3 percent to $1.3234.
A Reuters poll of economists shows that German corporate sentiment likely deteriorated in January to the lowest levels since German reunification in 1990, due to weakening demand and production cuts.
The U.S. Senate's decision on Monday to back Timothy Geithner to be Treasury secretary was in line with market expectations and had a limited impact on currencies, said a trader for a major Japanese bank. (Editing by Michael Watson)