* Yen gains sharply, model funds said selling euro
* Euro sold on uncertainty before ECB 1-yr refi operation
* Market cautious ahead of Fed meeting on Tues/Wed
By Charlotte Cooper
TOKYO, June 22 (Reuters) - The yen rose on Monday, gaining in particular against the euro and Australian dollar in a climate of uncertainty ahead of the Federal Reserve meeting this week and stalling investor confidence in riskier assets.
The euro was also under pressure as the market awaited the European Central Bank's first ever one-year refinancing operation on Wednesday aimed at getting banks lending again and reducing the cost of borrowing for banks, firms and consumers.
Traders said euro selling by funds which use computer trading models had kicked in, driving the single European currency lower against both the dollar and the yen.
This fed into already cautious sentiment among investors, who were also taking profits on trades in commodity-related currencies and other currencies which have rallied against the yen and dollar in the past three months along with shares.
"The markets overall are a bit whippy and the euro is under a bit of pressure as the market starts to focus on the long-term repo on Wednesday," said a senior trader at a European bank in Hong Kong.
The euro fell 0.4 percent to 133.67 yen, well down from its eight-month high above 139 set early in the month, and dropped 0.2 percent to $1.3909, well below a five-month peak of $1.4339 at the start of June.
Traders cited several factors as fuelling selling of the euro, including profit-taking ahead of the quarter end and an article in the Wall Street Journal about Germany's widening budget shortfall.
Uncertainty about the impact on the euro of the ECB's refinancing operation, how much liquidity it will generate and what it will do to money market rates was another factor weighing on the single European currency in Asia..
But investors are also awaiting a key measure of German business sentiment, the Ifo index, due at 0800 GMT, to see if it backs up a stronger-than-expected reading from the ZEW think tank's gauge of analyst and investor sentiment, which hit its highest level in over three years this month.
"People are carefully watching data from Germany now after the better-than-expected ZEW reading led to buying of the euro last week," said Hideki Amikura, deputy general manager of forex trading at Nomura Trust and Banking.
The dollar was down 0.2 percent at 96.11 yen, after falling as low as 95.78 earlier, as the Japanese currency's strength elsewhere helped it higher.
The Fed's Open Market Committee meets on Tuesday and Wednesday and the market is waiting to see what it says about the economic outlook and a rise in Treasury debt yields, and if it makes any move to expand or extend its debt buyback programme.
"The Fed needs to find a balance between not killing the recovery through rate hike hopes, while at the same time not over-committing on keeping rates low," UBS analysts wrote in a research note.
Markets have drifted in the past few days as investors are still trying to decide if a three-month rally in riskier assets, including shares, has outrun the pace at which the global economy is healing.
Shares were firmer but not blasting higher, with the Nikkei average up 0.7 percent and the Australian market rising 0.3 percent.
One trader said news that rating agency Moody's had warned California it faced a "multi-notch" downgrade in its credit rating if it failed to act quickly to produce a budget had also fuelled investor unwillingness to hold riskier positions.
As a result the yen gained on its crosses. The Australian dollar fell 0.8 percent to 77.02 yen and lost 0.4 percent to $0.8016.
Traders also cited talk that the Reserve Bank of Australia may not yet be done on interest rate cuts as putting some pressure on the currency, although opinion in the market is divided.
Sterling and the New Zealand dollar also fell against the yen, with the kiwi dropping against the U.S. dollar.
But RBC Capital Markets said in a client note that the yen faced likely mutual fund outflows this week which should support other currencies against the yen.
Japanese mutual funds being launched this week and investing in overseas assets are estimated at about $5.4 billion, according to Reuters data, with a further $1.25 billion worth expected next week up to the month-end. (Additional reporting by Aiko Hayashi and Satomi Noguchi; Editing by Michael Watson)