* Euro hits 9-month low on yen as stop losses triggered
* Yen-funded carry trades unwound as risk appetite suffers
* Obama's plans to regulate banks further hits sentiment
* Dollar softens on index, vs euro, Aussie
By Charlotte Cooper
TOKYO, Jan 22 (Reuters) - The yen surged against the dollar and the euro on Friday as a break of key support triggered stop-loss sales, while risk appetite lessened due to the White House's proposals to regulate U.S. banks.
The euro tumbled to a nine-month low of 126.55 yen after breaching a long-held chart support at 127.00 yen, taking the dollar down with it to its weakest in a month.
Both later trimmed the steepest of their losses, but the dollar slipped broadly as investors tried to assess what the White House plan meant for the greenback and U.S. assets.
High-yielding and commodity-linked currencies such as the Australian and New Zealand dollars also fell against the yen, partly on the U.S. plan and still undermined by worries that China may further tighten monetary policy in the coming weeks.
"The major trend in the market is to reduce risk positions," said a senior trader at a European bank in Tokyo.
The euro, which has been sold heavily this week on concerns about Greece's fiscal problems, later found buyers at its lows, with traders reporting leveraged accounts and Japanese life insurers buying euros for dollars and yen.
It fell 0.2 percent on the day to 127.09 yen and pulled up from a six-month low of $1.4029 set on trading platform EBS on Thursday to gain 0.3 percent to $1.4124.
It has lost about 1.5 percent against the dollar this week and 2 percent on the yen.
The senior trader said 127.00 was a critical level for the euro as a close below there this week would signal further falls.
Some said the next target was around 124.50 yen, near its low in April, while others looked to 125.70, a 50 percent retracement of its climb from last January's low near 112 to June's high above 139.
President Barack Obama's proposals include preventing major banks from owning, sponsoring or investing in hedge funds for their own profit..
"I can't say I'm convinced of the wisdom here," said Adam Carr, a senior economist at ICAP. "A bigger threat to the recovery and one I think we can all agree on is the growing prospect of over-regulation."
The plan drove down bank shares, Wall Street and share markets in Asia and pushed up Wall Street's fear index.
The proposed rules would also bar institutions from trading solely on their own behalf.
Traders said this was also a worry, as prop trading, as it is known, can be a source of profits for banks and bring liquidity to markets.
The dollar fell to its lowest in five weeks, dropping as far as 89.78 yen before returning to 90.00, although it still shed 0.5 percent on the day. Support is seen at 88.80/90 yen, an area it bounced from in mid-December.
Analysts said the market was still trying to figure out how to play the dollar in response to Obama's proposals.
Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney, said one school of thought was to buy the greenback based on the view that the plans heightened investor avoidance of risk, as seen in falling share markets.
"Or do you play U.S. dollar weakness given these proposals have a perceived weakening of the U.S.' competitive advantage in the global capital markets? At the moment the jury is still out."
A slew of U.S. data and a Federal Reserve policy meeting, both next week, are also likely to keep the market in risk-reduction mode, traders said.
The dollar index eased 0.2 percent to 78.192, just below its 200-day moving average at 78.48, which was seen as a zone of short-term resistance.
The Aussie dipped to its lowest in almost a month at $0.8983 as risk positions were cut.
Concerns that China will tighten lending and monetary policy have dragged commodity currencies down and were reinforced on Thursday by strong growth data and fears that inflation was starting to pick up pace.
The Aussie was also hit by a report that the Australian government could raise taxes on mining companies, which have been making bumper profits from surging metals and coal prices.
The New Zealand dollar dipped to its lowest in almost a month against the dollar but both it and the Aussie later benefited from some end-of-week dollar profit-taking.
They slid to their lowest in about a month against the yen.
One dealer at a Japanese securities house said Japanese retail investors were mostly staying on the sidelines while another said pension funds were buying back the Aussie dollar and the New Zealand dollar against the yen, helping the pairs off lows. (Additional reporting by Anirban Nag in Sydney, Satomi Noguchi, Kanori Kaneko and Shinichi Saoshiro in Tokyo)