* Yen extends gains against sterling, Aussie
* Dollar hit by stop-loss selling below Y97.50
By Masayuki Kitano
TOKYO, April 24 (Reuters) - The yen hit its highest level in about four weeks against the dollar on Friday, driven by the unwinding of money-losing positions, as the market awaited developments on U.S. banks' stress tests.
The yen gained broadly, with the Australian dollar falling 1.2 percent and sterling dropping 1.4 percent against the Japanese currency.
The yen was a popular currency to sell in February and March as investors bought commodity currencies and other majors expected to benefit once the global economy picked up.
But investors have been unwinding those bets since early April as a series of uncertainties loomed, including the findings of the stress tests and the fate of struggling U.S. automakers, and traders said position cutting continued.
"Some stops were hit on dollar/yen," said a trader for a European bank. The dollar ran into selling around 97.50 yen, a point it failed to breach earlier this week, as traders moved to limit their losses, he said.
The dollar fell 0.9 percent to 97.00 yen after dropping as low as 96.90 yen on trading platform EBS, its weakest since March 30.
Some of the losses came as China announced a rise in its gold reserves, although it said it would stick to major currencies and high-quality assets as it diversified its foreign exchange reserves.
Takahide Nagasaki, chief FX strategist for Daiwa Securities SMBC, said any diversification was unlikely to take place quickly.
"I doubt that China will immediately sell the dollar or U.S. Treasuries," Nagasaki said, adding that any sudden shift would only work against China, which has large holdings of U.S. debt.
The euro fell 0.7 percent against the yen to 127.95 yen, still some way off of a one-month low of 126.10 yen reached earlier this week.
It rose 0.3 percent to $1.3176, having come off a one-month low of $1.2885 hit earlier in the week.
WARY OF RISK-TAKING
Market players said investors were reluctant to aggressively expand their risk-taking as they await the U.S. authorities' unveiling of the stress test methodology for banks, and watch as Chrysler tries for a deal with Fiat but also readies a bankruptcy plan.
"Among those negative factors, risk aversion is increasing and the yen is the beneficiary," said Toru Umemoto, chief FX strategist Japan at Barclays Capital.
"I think short-yen was very popular in the past few weeks, and this yen appreciation is mainly brought by unwinding of the short positions," he added.
Players were also eying the possibility of yen-selling flows from Japanese investment trusts making foreign currency-denominated investments.
A number of such Japanese mutual funds are being launched this month, with some coming next week.
Separately, the Nikkei business daily said on Friday that Japan's Financial Services Agency was likely to impose limits on the amount of leverage that investors can use when trading currencies on margin.
Margin trading with leverage of around 100 to 600 times collateral has been increasing recently, and the FSA is looking at limiting the maximum amount of leverage to around 20 to 30 times, Nikkei said, adding that the new limit may come into effect as early as this summer.
Japanese margin traders slashed yen short positions late last year as the global recession and credit market turmoil heightened risk aversion. But there have been signs of renewed interest in yen-selling among Japanese retail margin traders.
Group of Seven finance ministers meet in Washington on Friday, but currencies are not expected to be a prominent topic of the talks. (Additional reporting by Charlotte Cooper; Editing by Chris Gallagher)