UPDATE 1-Euro rebounds on Weidmann comment; yen plunges
* Weidmann downplays talk of intervention to weaken euro
* Brainard says U.S. supports Japan's move to end deflation
* Concerns about Cyprus, Spain, Italy limit euro's gains
* Investors await BOJ, euro zone GDP and G20 meetings
NEW YORK, Feb 11 (Reuters) - The euro rallied from nearly three-week lows against the dollar on Monday after a European Central Bank policymaker said Europe's shared currency was not overvalued at current levels.
The yen plunged against the dollar and the euro after U.S. Treasury Undersecretary Lael Brainard said the United States supports Japanese efforts to end deflation and reinvigorate growth but that Japan needed to adhere to its G7 commitments regarding market-determined exchange rates.
The markets viewed her comments as a green light to sell the yen further, analysts said.
The dollar touched 94.42 yen, its highest level since May 2010. It was last at 94.35, up 1.8 percent.
"This suggests that the U.S. government has no problems with yen weakness and won't support any official criticism of Japan's exchange rate policies at the G20 meeting," said Kathy Lien, managing director at BK Asset Management in New York.
Meanwhile, discussions about an overvaluation of the euro are simply a diversion from governments' task of sorting out their economies, ECB council member Jens Weidmann said, resisting political pressure to weaken the currency.
He added that a currency policy aimed at weakening the euro would lead to higher inflation.
The euro, which fell against the greenback during the previous three sessions and was down 1.2 percent so far this month, was already buoyed by investors seeking to buy at lower levels, but gains accelerated after Weidmann's comments.
"Given the fragility of the markets lately, that was all it took to bring the single currency above $1.3400 and test the $1.3430 resistance area," said Matthew Lifson, senior analyst and trader at Cambridge Mercantile Group in Princeton, New Jersey.
The single currency could turn lower if a euro zone finance ministers' meeting on Monday and a G20 meeting later in the week exacerbate tensions over whether some countries are deliberately trying to weaken their currencies to boost exports.
The euro last traded up 0.4 percent at $1.3414 after hitting a session high of $1.3427.
Intraday bias remains mildly on the downside, said analysts at ActionForex.com. The firm said the pullback from this year's high of $1.3711 could extend to the 55-day exponential moving average at around $1.3247 and possibly below.
But the firm expects strong support at around $1.3075, the 38.2 percent retracement of that whole rise from the $1.2040 low hit in July last year to the 2012 peak of $1.3711. It expects that if the euro hits above $1.3458, that will turn bias back to the upside for a re-test of $1.3711 first.
"I think the market's view is that the euro is still going to continue to strengthen and it is common to see moments of pause like we have seen the last three days any time we have large directional moves," said Al Manbeian, managing partner at corporate FX broker GPS Capital Markets in Salt Lake City.
The Group of Seven nations, meanwhile, are considering issuing a statement this week reaffirming their commitment to "market-determined" exchange rates. That would be in response to heating rhetoric about a currency war, two G20 officials said on Monday.
France insisted on Monday that euro zone finance officials should discuss the rising strength of the euro, but several ministers played down the issue and the G7 was expected to call for "market-determined" exchange rates.
Dutch Finance Minister Jeroen Dijsselbloemon said on Monday Eurogroup ministers discussed the euro, but concluded that the debate belonged more with the G20 meeting later this week in Moscow.
Some remain uneasy about the euro due to political and fiscal uncertainty as well as last month's steep ascent. The bailout of Cyprus, Italian elections later this month and the allegations of a political scandal in Spain are among the concerns.
Against the yen, the euro rose 2.0 percent to 126.57 yen in the wake of Brainard's comments. The session peak was 126.59 yen, within striking distance of the 34-month high of 127.71 yen hit on Feb. 6.
The euro sold off last week after European Central Bank President Mario Draghi kept alive expectations of rate cuts and said the bank would monitor the economic impact of the strengthening currency.
Much of Asia was shut for the Lunar New Year holidays keeping volumes on the low side. Traders braced for more volatility later in the week with U.S. retail sales, European growth data, the G20 meeting in Moscow, and a Bank of Japan policy decision.
The BoJ, meanwhile, is expected to keep monetary policy steady this week. In the past few months, the yen has dropped as Prime Minister Shinzo Abe has put pressure on the central bank to take aggressive easing measures to revive the economy.
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