* Yen close to 20-month low versus dollar
* Abe to become Japan's prime minister on Wednesday
* U.S. fiscal talks impasse seen supporting dollar into year-end
* Dollar index stays above two-month low hit Dec. 19
LONDON, Dec 24 (Reuters) - The yen fell on Monday to trade near a 20-month low against the dollar after incoming prime minister Shinzo Abe heaped fresh pressure on the Bank of Japan to adopt a higher inflation target.
The yen, which rose on Friday as some investors trimmed large bets against it, was weighed down by Abe's comments on Sunday that he would try to revise a law guaranteeing the BOJ's independence if his demand for a binding 2 percent inflation target -- double its current goal -- is not met.
The dollar was up 0.3 percent on the day at 84.45 yen . Chartists said the dollar needed to overcome 85.05 yen, its 200-week moving average for it to sustain further gains.
"There has been some pretty significant yen selling all through the night and into this morning," said Peter Kinsella, currency strategist at Commerzbank.
"It is very noticeable we have not seen any retracement or dip in dollar/yen at all. The market is really saying they are convinced on yen weakness and that is what we are going to see for the remainder of this year and in the course of next year."
The U.S. currency hit a 20-month high of 84.62 yen last Wednesday as the yen fell after a landslide election victory for Abe's Liberal Democratic Party.
Abe, set to become Japan's prime minister on Wednesday, has called for aggressive monetary stimulus by the BOJ to beat deflation and this has dragged on the yen.
However strategists said further dollar gains against the yen could be limited.
"When we look at our positioning analysis, we see investors are holding extreme short yen positions, so any further rise in dollar/yen is likely to be capped around 84.50 yen," said Michael Sneyd, FX strategist at BNP Paribas.
The yen also slipped against the euro. The single currency was up 0.6 percent on the day at 111.70 yen, not far from a 16-month high of 112.59 yen, hit on Dec. 19.
The euro hit a session high against the dollar of $1.3234, up 0.3 percent on the day with offers cited above $1.3240. It hit an eight-month high of $1.33085 last Wednesday after speculators cut bets against the currency in recent weeks.
Strategists said developments on the Italian elections and Greece could see it grind higher in thin year-end trading. However, if an impasse over the so-called U.S. fiscal cliff deepened, investors could sell it for the more liquid dollar.
The dollar was, however, lower on the day against most major currencies. The dollar index, which measures the greenback's value against a basket of major currencies, was down 0.3 percent at 79.405, holding just above a two-month low of 79.008 set last Wednesday.
The dollar had surged on Friday after a budget plan proposed by the Republican speaker of the House of Representatives, John Boehner, failed to win support from his own party.
"We see this rise in the dollar at the end of last week as an opportunity for investors to put on new dollar short positions," BNP's Sneyd said. "We won't be surprised to see investors start to sell the dollar again while it is quiet."
Some U.S. lawmakers voiced concerns on Sunday that the country would go over the so-called U.S. "fiscal cliff", triggering tax increases and spending cuts early next year that could push the economy back into recession.
Focus has shifted to Congress acting after Jan. 1.
Sneyd said most expect U.S. policymakers to reach a deal on the fiscal issue just before year-end, or in early January.
That is likely to lift assets and currencies linked to growth like the Australian and New Zealand dollars.
Currency speculators increased their bets against the dollar, with net short positions rising to $6.39 billion in the week ended Dec. 18, from $1.03 billion the previous week, according to data released last Friday.