FOREX-U.S. dollar drops to 7 1/2-month low vs yen

* Yen rallies, pushes through 90 yen per dollar

* Euro rises on strong U.S. consumer sentiment report

* Sterling takes a hit, falls to 4-mth low vs dollar (Updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 25 (Reuters) - The U.S. dollar plunged to its lowest in more than seven months against the yen on Friday, weighed down by comments from Japanese Finance Minister Hirohisa Fujii, who said he opposed deliberately weakening the yen or any other currency.

Traders cited a Kyodo News report saying Fujii told U.S. Treasury Secretary Timothy Geithner in a meeting on Thursday evening he was opposed to manipulating the value of the yen. For details see [ID:nN25518058].

Japan had intervened in the currency market in the past to weaken the yen as this helped keep its competitive advantage in global trade. But the new finance minister believes that the yen should reflect Japan's economic conditions.

"People are now not afraid to sell dollar/yen below any critical level after Fujii's made those comments overnight since there is no longer any fear of central bank activity," said Matt Kassel, director of foreign exchange at ING Capital Markets in New York.

Fujii was in Pittsburgh this week for a meeting of the Group of 20 developed and emerging market countries. A draft G20 statement leaked to the news media late on Thursday said global stimulus measures will stay in place, suggesting interest rates will remain low. [ID:nLH78576]

That also pressured the U.S. currency because with near zero interest rates, investors would have less reason to hold dollar-denominated assets.

But it was Fujii's comments that traders talked about on Friday, practically giving them the license to sell the dollar against the yen as the greenback fell as low as 89.52 yen, the lowest since mid-February.

INTERVENTION THRESHOLD

"I think this year, dollar/yen can probably fall somewhere between 84-85 yen," Kassel said. However, he was not ruling out Japanese intervention entirely, but he believed the government won't intervene until the currency pair drops below 78 yen.

The record low in 1995 was 79.70 yen, according to Reuters data. "I think you need to see a push below that to justify a disorderly type move that deviates from fundamentals," Kassel said.

In late afternoon trading, the dollar was last down 1.7 percent at 89.71 yen JPY=. The euro also fell 1.6 percent to 131.69 yen EURJPY=.

Analysts said investors repatriating funds before Japan's fiscal year hits the halfway mark on Sept. 30 also lifted the yen.

The euro edged higher against the greenback, helped by encouraging data showing U.S. consumer sentiment hit its highest level this month since January 2008. [ID:nN25501082].

The euro has been viewed as one of the proxy currencies for risk appetite, moving in tandem with positive economic data and higher stocks.

The euro rose 0.2 percent to $1.4682 EUR=. A separate report showing U.S. new homes sales edged up in August also boosted the euro zone's single currency.

The dollar fared better against sterling, which fell to multi-month lows a day after Bank of England Governor Mervyn King said a weak pound would help exports and the UK economy.

The pound GBP=D4 fell to $1.5919, its lowest since early June, before edging back to $1.5931, down 0.8 percent, while the euro rose above 92 pence EURGBP= for the first time since April.

King's comments hit the UK currency, as did perceptions that the Bank of England will lag other central banks in ending its loose monetary policy.

Meanwhile, Federal Reserve Governor Kevin Warsh said on Friday U.S. interest rates could rise sooner than most people expect, which helped ease the negative stance on the dollar. [ID:nN25513396]. (Additional reporting by Steven C. Johnson; Editing by Kenneth Barry)