* Yen hits 1-mth high vs euro, but later gives up gains
* Some traders cite yen buying linked to currency derivatives
* Bank of America's bad loans jump, underscores banks' woes
* Euro mired near one-month low vs dollar, focus on ECB
By Masayuki Kitano
TOKYO, April 21 (Reuters) - The yen briefly hit a one-month high against the euro on Tuesday as renewed concerns about the U.S. banking sector tempered risk appetite and triggered buybacks of the Japanese currency.
The yen initially added to the gains it made on Monday when U.S. equities slid after Bank of America reported a jump in non-performing assets, underscoring the banking sector's troubles.
In addition, the yen drew support after breaching key chart levels in the past few sessions against currencies such as the euro and the Australian dollar, market players said.
"Equities are weak and market players who had bought higher-yielding currencies against the yen earlier amid signs of optimism are dumping their positions," said a trader for a major Japanese bank.
There have been signs of improving investor risk appetite in recent weeks, as could be seen in the Australian dollar's rally to six-month highs against the yen and the dollar last week.
Market players said the yen was unlikely to see the type of rally it experienced from late last year to early this year, when the low-yielding currency surged to 13-year highs against the dollar due to unwinding of yen carry trades.
"Unlike before, only limited players are left with yen-short positions, so the yen won't rise so much either, even if investors grow risk averse," said Minoru Shioiri, chief manager of FX trading at Mitsubishi UFJ Securities.
The euro fell to 126.10 yen on trading platform EBS, its lowest since mid-March. But it later rebounded to 126.96 yen, up 0.3 percent from late U.S. trading on Monday.
The euro rose 0.1 percent against the dollar to $1.2932, but was not far from a one-month low of $1.2888 hit on EBS on Monday.
The dollar rose 0.3 percent to 98.17 yen, up from a three-week low of 97.66 yen hit on Monday.
FOCUS ON ECB
The euro has been under pressure in the past few sessions, hurt by uncertainty over what policy steps the European Central Bank may adopt next month.
ECB President Jean-Claude Trichet signalled on Sunday during a trip to Tokyo that the bank's next move could likely be an interest rate cut of 25 basis points.
But Trichet kept mum on details of plans for unconventional policy responses that are due to be unveiled at the ECB's policy meeting on May 7.
Some traders said the yen initially gained a lift from flows linked to complex currency derivatives.
One trader said there was talk of dollar selling against the yen as a hedge against exposure to power-reverse dual currency (PRDC) notes.
There was also some talk of Australian dollar selling against the yen linked to the unwinding of positions taken in structured bonds.
The Australian dollar edged up 0.6 percent against the yen to 68.77 yen, after falling to 68.18 yen earlier in the day and having slid more than 4 percent on Monday.
The Australian dollar hit six-month highs of 73.49 yen and $0.7328 last week, supported by growing views that the worst of the global economy's woes may be over. (Additional reporting by Satomi Noguchi in Tokyo and Vidya Ranganathan in Singapore; Editing by Chris Gallagher)