* New Zealand dollar falls 0.8 percent
* Euro burdened by inflation concerns, Eonia rate rises
* U.S. dollar pauses ahead of industrial production
* Pound awaits UK retail sales
LONDON, Jan 17 (Reuters) - The New Zealand dollar was the biggest faller among major currencies on Friday, halting a run that has seen it hit 9-month highs on an improving economy and expectations of higher interest rates.
The euro, suffering from worries over the threat of deflation in areas of a still fragile European economy, lost some ground, with the day's focus expected to be U.S. industrial production data later.
Traders say hedge funds have taken profit on the kiwi's gains against the Australian dollar this week by buying U.S. dollars. Bank of New Zealand on Friday said it would sell the kiwi above $0.8400 as the currency faces some downside risks in the near term, including a CPI reading next week which may scotch expectations of a first rise in rates this month.
"In our G-10 valuation table it is the New Zealand dollar that now tops the list as the most over-valued currency," Bank of Tokyo-Mitsubishi UFJ analyst Derek Halpenny said.
"Given how well priced an RBNZ rate hike is this year, we would not expect strong buying from current levels if the RBNZ does hike this year."
The Kiwi traded 0.8 percent down on Thursday's U.S. close at $82.89. It lost a similar amount against the Australian dollar before recovering a touch to trade half a percent lower at 1.0601 New Zealand dollars per Aussie. It had been at the 9-month high against a basket of currencies.
In Europe, a rise in Eonia rates due to a fall in banking sector liquidity was drawing attention. The European Central Bank last week made an "unwarranted" rise in market rates one of the conditions that might prompt it to ease monetary conditions further.
The prospect of further action to support growth - at a time when the ECB's U.S. and British peers are beginning to look at tightening conditions - is expected to weigh heavily on the euro this year, even as the economy improves.
Analysts from Germany's Commerzbank said the doubts over the U.S. recovery prompted by last week's poor jobs readout were countered by the worries over Europe prompted by a dive in inflation late last year.
"That results in a 1.3550-1.37 range that no one really wants to leave as there are no truly convincing arguments for either currency," they said in a note.
The single currency was down 0.1 percent at $1.3599.
Against the yen, the dollar eased to 104.27 yen from Thursday's one-week peak of 104.925. That left it well within a familiar range between 104 and 105, which some dealers said is supported by options expiring on Friday at 104.00, 104.50 and 105.00.
Sterling was softer at $1.6340 after hitting a one-month low of $1.6316 on Thursday.
The pound is struggling to extend gains from the past six months, given that a lot of good news about the economy has already been priced in.
UK retail sales data due out later on Friday will offer more clues on how the British economy, a bright spot in Europe, is travelling.