* Yen down sharply as Japan fiscal year comes to an end
* Euro gains vs dollar; European stocks rise 2 percent
* Focus on G20, ECB meeting; euro gains seen limited
(recasts, changes byline, adds quotes, updates prices)
By Veronica Brown
LONDON, March 31 (Reuters) - The yen fell broadly on Tuesday as the Japanese fiscal year came to an end, while the dollar lost ground against the euro with quarter-end flows overriding fundamentals even as markets geared up for a G20 meeting.
Market pessimism seemed to ease off slightly, with European stock markets rising roughly 2 percent to claw back some of Monday's hefty losses sparked by fears of bankruptcy for U.S. automakers General Motors and Chrysler.
This also weakened demand for the dollar and the yen, which had both gained previously on extreme risk aversion.
The euro gained in counter-intuitive fashion after Standard and Poors downgraded Ireland and Hungary's credit ratings on Monday, with dollar selling for month-end and quarter end dominated activity.
Data earlier showed euro area inflation had fallen to a record low 0.6 percent year on year in March and a bigger-than-expected rise in the German jobless total in February.
"I would have thought that the news from Ireland and Hungary on Monday would be negative for the euro, but traders are talking about a lot of dollar selling for the end of the quarter so lets see what happens tomorrow," said Chris Turner, head of FX research at ING in London.
By 1230 GMT, the euro was up 2.1 percent at 131.11 yen, while the dollar rose 1.2 percent to 98.45 yen, with technical strategists saying the pair was well placed to top the 100 yen mark.
The greenback is on course for a gain of more than 8 percent against the yen for the first quarter of 2009, its biggest quarterly rise since the end of 2001, according to Reuters data.
"The yen is likely to remain under pressure this week, with speculation that Japanese investors are ready to start moving funds overseas again," said Lee Ferridge, FX strategist at State Street in London.
Outside of yen selling, the dollar fell 0.7 percent versus a basket of major currencies to 85.147, while the euro was up 0.8 percent at $1.3323.
Currencies perceived to be higher risk also gained, with the Australian dollar up 1.8 percent to $0.6930.
G20 EYED, DLR TALK RISES
Focus was switching to the summit of Group of 20 leaders in London this week, with investors hoping that they may reach agreement on measures to help revive the global economy.
Japan announced plans for a third stimulus plan for the world's second biggest economy, two days before the G20 meeting .
Questions around the dollar's status as the globe's main unit have also gained traction since China suggested the wider use of Special Drawing Rights (SDR) created by the International Monetary Fund as an international reserve asset.
But World Bank President Robert Zoellick said the dollar will remain the world's dominant reserve currency and a strong U.S. currency is critical to pull the world out of crisis,
He said it would take more than a Group of 20 summit to establish a new reserve currency, which requires functioning financial markets.
ECB EYED
Later this week, the ECB is seen cutting rates by 50 basis points to 1.0 percent, with a possibility it will follow other major central banks and adopt some form of unconventional measures to boost money supply. See.
Meanwhile, the S&P sovereign ratings downgrades on Ireland and Hungary renewed concerns both about the financial health of countries on the euro zone's periphery and about western European banks' hefty exposure to eastern Europe. See and.
"The inflation data underlines that the euro zone is as much a victim of the current crisis as the U.S. and the UK and the European Central Bank will be forced to adopt more aggressive measures," Tullet Prebon G7 market economist Lena Komileva said.
(Additional reporting by Jessica Mortimer in London)
(Reporting by Veronica Brown; Editing by Ron Askew)