* Yen rallies broadly, hits 8-month high versus dollar
* Japan finmin says yen gain not "abnormal" then backtracks
* Euro shows little reaction to German election
(Updates into European midsession, changes byline)
By Emelia Sithole-Matarise
LONDON, Sept 28 (Reuters) - The yen retreated from an eight-month high hit against the dollar on Monday after Japan's finance minister appeared to tone down comments suggesting he was comfortable with the currency's appreciation.
The dollar rose against higher-yielding currencies, including the euro, as weaker global shares reflected chilled risk demand. The single European currency brushed off a widely expected election victory by German Chancellor Angela Merkel.
The yen jumped to 88.23 yen against the dollar, its strongest since late January, rising for a third consecutive session after reported comments by Japanese Finance Minister Hirohisa Fujii that recent dollar/yen moves were not abnormal.
Later on Monday, Fujii said he had never said he approved of a strong yen nor that he would leave a yen rise "as it is". [ID:nT241084]
Japanese Prime Minister Yukio Hatoyama also weighed in, saying the recent rise in the yen had been been tough for small firms. [ID:nTKF106629]
"It seems like he (Fujii) saw the moves his comments created and sort of backtracked to avoid further yen strength," said Christian Lawrence, a currency strategist at RBC Capital Markets in London.
"For the day ahead it looks like we are seeing the dollar trade on the back of its safe-haven credentials and FX moves seem to be tracking equities."
By 1105 GMT, the dollar
IFR reported that a hefty $5 billion in options at 90 yen would tick over on Monday, and some in the market said any rise towards that level would result in selling. Around $200 million in options at 89 yen will also expire later in the session.
The yen has rallied broadly, pushing the dollar down about 4 percent so far this month on the view Japan's new government may be more tolerant than its predecessor of a stronger yen.
Overall, analysts said more yen gains were likely and that a rally to the year's high of 87.10 yen was possible.
FOCUS ON EQUITIES
The euro
Weaker stocks hit the Australian and New Zealand dollars, which fell 0.4 and 0.9 percent respectively against the greenback.
Yen gains against the dollar pushed the Japanese currency
broadly higher, pushing the euro
Some analysts said a sustained reversal in equity gains was imminent due to uncertainties about the global economic recovery and that this might push the yen higher.
"The seal has been broken, dollar/yen is going down ... and yen crosses are toast," said Maurice Pomery, managing director of Strategic Alpha in London.
"There's a danger that equities are beginning to turn and the data is going with it so there's a worry for holders of some of the commodity currencies."
The pound stayed on the ropes, sliding sharply to as low as
$1.5770
In Sunday's German election, Chancellor Angela Merkel's conservatives won a parliamentary majority with the pro-business Freed Democrats, her partner of choice, enabling her to end her awkward partnership with the Social Democrats. [ID:nLS158960]
Analysts said the vote outcome was widely expected by the market, and would be neutral to marginally positive for the euro, particularly if a new centre-right coalition carried out necessary reforms over the next four years.
(Additional reporting by Naomi Tajitsu, editing by Nigel Stephenson)