* Malaysian jet downing drives U.S. yields lower and buoys yen
* Dollar/yen posts biggest one-day loss since early April
* Yen hits five-month high against euro (Adds details, quotes)
By Shinichi Saoshiro
TOKYO, July 18 (Reuters) - The yen hit a five-month high versus the euro on Friday and held some of its overnight gains against the dollar as investors saw the currency as a safe haven after the downing of an airliner over Ukraine and the Gaza conflict stoked geopolitical tension.
The Malaysian Airlines passenger jet was brought down over eastern Ukraine. All 298 people on board were killed, sharply raising the stakes in a conflict between Kiev and pro-Moscow rebels in which Russia and the West back opposing sides.
Israel announced the start of a ground campaign in Gaza on Thursday after 10 days of aerial and naval bombardments failed to stop Palestinian rocket attacks.
Rising geopolitical concerns hurt risk assets such as equities and sent investors to the relative safety of U.S. Treasuries, driving yields lower and pushing the yen up against the dollar overnight.
On Friday the dollar edged up 0.2 percent to 101.34 yen but it had slid nearly 0.5 percent overnight, its biggest one-day loss since early April. A break below 101.06 yen would take the greenback to a two-month low.
The euro, which has lost roughly 0.9 percent against the yen this week, traded at 137.04 yen after reaching a five-month low of 136.715 yen earlier in the session.
The euro was within a short distance of $1.3512, its lowest in a month against the U.S. currency.
The single European currency has found support above the $1.35 threshold, however, helped by fundamental factors such as falling U.S. yields, a massive current account surplus and benefits from the diversification of currency reserves.
The benchmark 10-year U.S. Treasury yield fell to a seven-week low of 2.441 percent on Thursday.
“Put simply, U.S. Treasury yields declined on heightened geopolitical woes and hurt dollar/yen, which has a high correlation with yields,” said Masafumi Yamamoto, market strategist at Praevidentia Strategy in Tokyo.
“The yen is being bought but not through the flight-to-quality-type bids seen in the past. The yen does not offer as much quality any more since Japan is becoming a nation with a current account deficit and inflation is taking root.”
The S&P 500 share index posted its biggest one-day percentage drop since April after news of the jet’s downing.
The CBOE Volatility Index jumped 32.2 percent on Thursday, the biggest percentage gain since April 2013 for the indicator known as “the fear gauge”.
Market players said the yen could remain supported as long as the VIX stayed high.
“The financial markets showed a knee-jerk reaction to the Malaysian jet news, but calm should prevail as it still essentially boils down to relations between two countries, Russia and the United States,” said Koji Fukaya, president at FPG Securities in Tokyo.
“The U.S. economy is showing signs of strength and the dollar should eventually bounce back. What is happening is a shock to the market but it does not threaten the financial system, so the impact of such events tend to be short-lived,” he said.
The dollar steadied against the Swiss franc, another safe haven unit. It was little changed at 0.8979 franc after pulling back overnight from a one-month high of 0.8989 hit midweek. (Editing by Eric Meijer and Alan Raybould)