* Dollar, euro initially drop vs yen after BOJ, then push to session highs
* Aussie dollar takes RBA in stride, rises to fresh one-month high
By Lisa Twaronite
TOKYO, Feb 18 (Reuters) - The yen dropped against its major counterparts on Tuesday, after the Bank of Japan held policy steady as expected and extended a special lending program to support the economy.
The BOJ maintained its upbeat economic assessment, suggesting no further easing steps are on the near-term horizon.
The central bank also decided to extend, as expected, three special loan facilities by one year from their scheduled expiry at end March.
It raised the maximum amount of the loans to 7 trillion yen from 3.5 trillion yen, and said financial institutions will be able to borrow funds at a fixed rate of 0.1 percent over 4 years instead of 1-3 years at present.
"The announcement should be very helpful for banks' profits, so it's very natural that the Nikkei should rise, led by banks, and that's why the dollar/yen soared," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
The Nikkei stock average ended up 3.1 percent.
While some market participants apparently viewed the loan program expansion as a policy signal that the BOJ stood ready to take a more accommodative stance if necessary, Murata cautioned that the reaction in the Japanese government bond market suggested this was not the case.
"Bank shares drove the Nikkei, which drove the yen, but JGBs did not react much," he said.
The benchmark 10-year JGB yield was flat at 0.600 percent in late afternoon trade.
Some market participants also used the BOJ's announcement as a convenient excuse to buy back dollars after the greenback's overnight fall.
"People just saw the news about the loans and jumped on the bandwagon to buy back dollar/yen and cover their shorts after its drop to session lows after the BOJ held steady," said a director at a foreign exchange market research firm in Tokyo.
The dollar rose about 0.8 percent to 102.69 yen, rising as high as 102.74 yen, or nearly a full yen above its session low of 101.76 yen hit in the immediate wake of the BOJ's announcement. It pulled further away from a nearly two-week low of 101.37 yen touched in the previous session.
The euro also added about 0.7 percent on the day to 140.74 yen, rising as high as 140.84 yen from a session low of 139.50 yen marked after the BOJ's announcement.
Against a basket of currencies, the dollar retook some lost ground and steadied on the day. The dollar index fell as low as 79.951 in the previous session, its lowest since late last year, before ticking up about 0.1 percent to 80.220.
U.S. markets were closed on Monday for the Presidents Day holiday.
Market participants will be waiting to see if Governor Haruhiko Kuroda maintains the stance he took last month -- that no further easing was needed now with prices rising steadily and overseas economies recovering -- or if he hints at any more steps following disappointing growth data this week.
Kuroda will hold an embargoed news conference from 3:30 p.m. (0630 GMT) with his comments expected to come out any time after 4:15 p.m. (0715 GMT).
Gross domestic product data released on Monday showed the Japanese economy grew less than expected in the fourth quarter as consumer spending, business investment and exports disappointed, a worrying sign of waning momentum ahead of April's planned increase in the national sales tax.
The Australian dollar was up about 0.1 percent at $0.9061 , after rising to a one-month high of $0.9079.
"Fundamentals aren't really driving it. It's quite clear that what's going on is liquidation of U.S. dollar longs, as the market rebalances," said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong.
In minutes released on Tuesday of the Reserve Bank of Australia' Feb. 4 meeting, when the RBA surprised some by dropping its bias to ease further, the central bank noted that a lower exchange rate would support growth.
The RBA said it saw signs policy stimulus was working to spur economic activity and as a result it was prudent to keep interest rates steady for a while.
The euro was steady on the day at $1.3704, not far from a high of $1.3723 touched on Monday, its highest level since Jan. 24.
European Central Bank governing council member Ewald Nowotny said on Monday that a negative deposit rate from the ECB may fail to stimulate more lending and could have an adverse psychological effect.
The single currency was also helped by data on Friday showing both Germany and France grew slightly faster than expected in the fourth quarter.