* Yen hits 6-week highs vs dollar and euro
* Dollar/yen, cross/yen drop seen led by short-term players
* Eyes on G8 summit
By Masayuki Kitano
TOKYO, July 8 (Reuters) - The yen hit its highest levels in more than six weeks against the dollar and euro on Wednesday as traders bet that a recent pullback in risk assets could provide the impetus for a further rise in the Japanese currency.
Sterling hit a one-month low against the dollar after weak industrial output data the previous day reinforced doubts about a UK recovery.
The dollar had fallen broadly since March, as hopes grew that the worst of the global economic recession was over, boosting risk appetite and prompting investors to shift funds out of the safe-haven dollar into other currencies and assets.
But in recent weeks, market players have started to fret that optimism about the global economy's recovery prospects and the rally in risk assets may have been overdone.
Such doubts have helped pull currencies such as the Australian dollar, sterling, and the euro off peaks hit in June, and the dollar and the yen have risen in the past few weeks.
Currencies such as the euro and sterling extended their falls against the yen on Wednesday, as short-term traders latched on to the theme of risk reduction, said a trader for a major Japanese bank.
"They are selling cross/yen, guessing that everyone else will sell too," the trader said, adding that there was selling by both Japanese players as well as macro hedge funds.
The euro fell 0.7 percent to 131.15 yen.
Earlier, the euro fell to as low as 130.96 yen, its lowest since late May.
The yen rose broadly, with the dollar hitting a six-week low of 94.15 yen on trading platform EBS. Traders said speculators sold dollars to try to push it down along with cross/yen and the Nikkei share average's 2 percent drop.
But the market saw plenty of two-way action, with Japanese importers buying dollars and some investors also buying dollars to defend options positions said to be just above 94 yen, traders said.
"Turnover in dollar/yen trade picked up today. Dollar bids keep coming, helping the market digest dollar offers," said a forex trader at a Japanese trust bank.
Against the Japanese currency, sterling also reached its lowest in more than a month of around 151.50 yen.
One broker specialising in forex margin trading said Japanese retail traders were selling to unwind long sterling positions in a general sell-off of riskier currencies against the yen.
Sterling dipped 0.2 percent to $1.6092, hovering near a one-month low of $1.6060 hit earlier in the day.
Sterling's fall came ahead of a Bank of England policy decision on Thursday.
The central bank is expected to keep interest rates at a record low of 0.5 percent and is seen likely to expand its 125 billion pound quantitative easing programme.
The euro dipped 0.1 percent to $1.3906.
Koji Fukaya, a senior currency strategist for Deutsche Securities, said a full-fledged return to risk aversion was unlikely.
"The trend towards a gradual economic recovery seems unchanged. But markets had staged a V-shaped rebound and there are questions about whether such moves can be sustained so there has been some correction," Fukaya said.
Market players said they were watching for any comments in the debate on the dollar's role as the world's reserve currency before a three-day meeting of leaders of the Group of Eight industrial nations and leading developing nations in Italy that starts later on Wednesday. (Additional reporting by Rika Otsuka; Editing by Chris Gallagher)