FOREX-Dollar plummets against the yen on option expiration

* Dollar falls vs yen as FX options expire

* Dollar at 7-1/2-year peak vs sterling on UK banking woes

* Euro up from 6-week low versus dollar

(Recasts, adds details and quotes, updates prices)

NEW YORK, Jan 21 (Reuters) - The dollar plunged against the yen on Wednesday in technical trading as a dollar/yen options position at 90 yen expired without being exercised.

The position had been defended by buying dollars against the yen but with the expiration, the holder no longer had to buy dollars but rather wanted to sell them, pushing dollar/yen to a session low.

Dollar selling against the yen spilled over into euro/yen with the single currency falling to its lowest level since March 2002.

The dollar rose to a fresh 7-1/2 year high against sterling on Wednesday as woes about the British banking sector continued to weigh on the pound, while the euro rose against most major currencies.

"This is still on the back of the 90 yen option which I heard was at $5 billion. So there was a lot of dollar/yen to sell," said Matt Kassel, director of foreign exchange at ING Capital in New York.

The dollar fell as low as 87.15 yen JPY= before recovering to 87.84 yen, still down 2.2 percent on the day. Euro/yen EURJPY= fell as low as 112.08 yen, and was last at 113.33 yen, down 2.1 percent.

The dramatic decline in currencies against the yen raised speculation Japanese authorities may intervene to stem the rise in the yen.

"People will be testing the (Japanese) Ministry of Finance to see if they will intervene and in what size," said Dustin Reid, currency analyst, at RBS Global Banking & Markets in Chicago. "By pushing 87 in dollar/yen, we are getting there. It's also about the speed of the move, not just the absolute level."

Reid said 85 yen on dollar/yen was a key level which could spark both direct and aggresive verbal intervention.

CABLE ACTION

Foreign currency market action was also centered on the pound, which has fallen around 7 percent against the U.S. unit since the start of the week. Sterling has extended losses on concerns that UK banks will need to shore up their financial health as the economy deteriorates, and that a government package announced earlier in the week may not help.

Shares in Britain's Barclays Plc tumbled a third in value to a 24-year low in London on Wednesday on the threat it needs to raise funds or could be nationalized. [ID:nLL283101].

Shares in rival British bank Lloyds Banking Group also fell sharply as it faces an even greater risk of nationalization.

"Fiscally, the UK does not look too clever anymore as they are throwing money at everything," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. "We have not seen a bottom for sterling."

Midway through the New York session, sterling was down 1.1 percent at $1.3752 GBP= after falling to its lowest since June 2001.

Simpson of Action Economics sees sterling trading as low as $1.25 in the near term.

The British currency was last at 120.84 yen GBPJPY=R, down 3.3 percent though off a record low touched on Wednesday, according to Reuters data.

BoE minutes showed the BoE's Monetary Policy Committee voted 8-1 to cut interest rates by 50 basis points to a record low of 1.5 percent this month, with arch-dove David Blanchflower calling for a 100 bps reduction.

Policy-makers also said the fall in the pound would help support growth and the rebalancing of the economy. But they noted that if there were indications -- perhaps from lower gilt prices -- that a weakening exchange rate reflected a loss of credibility in UK policy, then that would be bad news for the medium-term outlook.

The euro was up 0.1 percent against the dollar at $1.2900 EUR=.

Treasury Secretary-designate Timothy Geithner's testimony to the U.S. Senate Finance Committee had little impact on trading, analysts said.

(Reporting by Nick Olivari, Additional reporting by Gertrude Chavez-Dreyfuss and Steven C. Johnson in New York, Editing by Chizu Nomiyama)