(Corrects first bullet point to show dollar rises vs yen)
* Dollar hits highest vs yen since August 2010
* Some strategists say dollar/yen could target 90
* Dollar index hits 2-week high, budget talks in focus
LONDON, Dec 28 (Reuters) - The yen fell to its lowest in more than two years versus the dollar on Friday, weighed down by expectations the new Japanese government will push the Bank of Japan to ease monetary policy further.
The Japanese currency's unabated slide, since Shinzo Abe took the helm as Japan's prime minister on Wednesday, has seen it hit fresh two-year lows for three days in succession. Abe has vowed to press for aggressive monetary stimulus to fight deflation.
The dollar rose as high as 86.64 yen, its strongest versus the Japanese currency since August 2010 and close to reported options barriers at 86.75 yen and 87.00 yen.
It later trimmed those gains and was last up 0.25 percent on the day at 86.29 yen.
"Clearly there is some momentum in dollar/yen on expectations the BOJ will become more expansionary and this is currently weighing on the yen," said Marcus Hettinger, global FX strategist at Credit Suisse.
He cautioned, however, against expecting the yen to slide much lower until the BOJ implements some of the policies Abe has been pushing for.
The dollar's steep ascent versus the yen was likely to see it end the week above its 200-week moving average, now at roughly 84.95 yen, for the first time since late December 2007, a technical signal indicating further gains.
The yen has fallen more than 12 percent against the dollar in 2012, putting it on track for its biggest annual percentage drop since 2005 and leading strategists to revise outlooks.
"A lot of people are looking for 90 as a reasonable target," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
In a research note on Friday, analysts at JPMorgan revised their forecast for the dollar's range in 2013 to between 80 yen to 90 yen, from 75 yen to 85 yen previously.
The yen also fell against the euro, touching its lowest level in about 17 months. The euro rose to 114.675 yen on trading platform EBS, its strongest since July 2011, with the potential to test its 200-week moving average around 115.00 yen.
The euro was last up 0.5 percent at 114.37 yen.
Gains against the yen also helped the dollar to a two-week high against a basket of currencies, with its index rising to 79.869.
The euro turned lower against the dollar, falling 0.35 percent to hit a session low of $1.3184, with investors cautious as they waited to see the outcome of a last-chance round of U.S. budget talks.
Analysts cautioned against reading too much into intraday moves, however, adding that thin liquidity over the year-end holiday season was causing exaggerated movements in currencies.
U.S. President Barack Obama will meet congressional leaders from both parties on Friday to try to revive talks to avoid tax hikes and spending cuts -- together worth $600 billion -- that will begin to take effect on Jan. 1.
Strategists have said that the dollar could benefit from safe-haven buying if no deal is reached by year-end. (Editing by Nigel Stephenson)