* Dollar hits lowest since January versus yen below 89
* Japan finmin says yen gain not abnormal, then backtracks
* Dollar higher versus euro, basket of currencies (Adds quote, detail, updates prices)
By Wanfeng Zhou
NEW YORK, Sept 28 (Reuters) - The dollar rebounded from an eight-month low against the yen on Monday after Japan's finance minister appeared to tone down comments suggesting he was comfortable with the Japanese currency's strength.
The dollar earlier dropped below 89 yen after Hirohisa Fujii told Dow Jones Newswires current moves were "not abnormal," raising speculation the new government was unlikely to intervene to weaken its currency.
The yen later surrendered gains as Fujii said it was wrong to see his comments as a license to push the currency higher. Japanese Prime Minister Yukio Hatoyama said the recent rise in the yen had been been tough for small firms.
"The comments by the finance minister seemed to be an open door to people who were bullish on the yen," said David Watt, senior currency strategist at RBC Capital Markets.
"His subsequent statement and the statement by Japan's prime minister both caused people to take a little bit of a pause -- that the Japanese yen is not so much a one-way bet," he added.
In late New York trading, the dollar traded little changed at 89.67 yen, after falling as low as 88.22 yen, according to Reuters data, the lowest level since January. The dollar/yen pair has dropped 3.6 percent so far this month.
Some analysts said more yen gains were likely and that a rally to the year's high around 87.10 yen was possible.
But Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey, said the dollar/yen pair may have seen the bottom for now.
"We might have just put in a significant low in dollar/yen overnight. Typically when you get a very sharp rebound like (today's), it's an indication that the down move is beginning to reverse," he said.
"Ultimately, we think (Fujii) is going to have to moderate his views on the strength of the yen or Japanese exporters are going to be in dire straits very soon," he added.
STRONG DOLLAR
The U.S. dollar rose against the euro and a basket of currencies despite a rally in U.S. stocks. The dollar and equities have moved conversely of late as optimism about an economic recovery has prompted investors to scoop up higher-yielding assets.
The euro slipped 0.6 percent to $1.4601. The ICE Futures U.S. dollar index, which tracks the greenback versus a basket of six currencies, rose 0.2 percent to 76.994.
"The dollar in general looks to have stepped back from some of those typical relationships," Dolan said. "It's more a gradual shift in sentiment that the dollar has weakened sufficiently. Its inability to make new lows is starting to see some of the dollar short positions to come off."
Comments from European Central Bank President Jean-Claude Trichet on Sunday that U.S. policy makers' commitment to a strong dollar was important in keeping currency markets and the global economy stable also caused some dollar buying.
Analysts said that with last week's Group of 20 meeting past, focus was turning to this week's busy economic calendar, including a key U.S. jobs report on Friday.
Forex options and futures markets show U.S. dollar sentiment is at "major bearish extremes versus many major currencies," strategists at DailyFX.com wrote in a note.
"Such one-sided sentiment strongly suggests that the U.S. dollar could soon recover from its recently sizable losses."
The pound stayed on the ropes, sliding to its weakest since late May and breaking below support for sterling around $1.5800. It last traded at $1.5871, down 0.5 percent. (Additional reporting by Leah Schnurr; Editing by Kenneth Barry)