FOREX-Yen, dollar fall as equity mkts recover poise

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* Citi merger talk, equity rebound prompt FX turnaround

* "Risk" currencies like sterling, Aussie and NZ dlrs rise

* General economic, financial distress likely to limit move

* Dlr up at 95.20 yen JPY=, euro up to $1.2530 EUR=

By Jamie McGeever

LONDON, Nov 21 (Reuters) - The yen fell back sharply from earlier highs and the dollar weakened broadly on Friday as a rebound in global stocks from the previous day's rout curbed investors' demand for the Japanese and U.S. currencies.

Talk that beleaguered U.S. bank Citigroup (C.N) could explore a merger deal, Japanese officials warning that the recent equity market slide is destabilising and speculation China may cut interest rates helped lift risk appetite.

Tokyo's Nikkei share average erased earlier losses and climbed 2.7 percent .N225 on expectations of a strong Wall Street recovery after the S&P 500 index slumped on Thursday to its lowest point since 1997. [.T]

Traders were also wary of adding to bets on the yen after Japanese Finance Minister Shoichi Nakagawa said authorities must be ready to deal with big market swings. [ID:nTKG003105]

The improvement in equity market sentiment followed a day of extreme volatility which had driven investors to the relative safety of government debt and in currencies, the yen.

On Thursday Citi lost a quarter of its value, fears over the U.S. auto industry deepened, U.S. three-month T-bill yields fell to virtually zero, U.S. equity volatility closed at a record high and U.S. weekly jobless claims soared.

The Swiss National Bank stunned markets with a surprise interest rate cut of 100 basis points.

Fears over the global financial crisis and deepening recession in many economies were highlighted on Friday, however, by surprisingly weak euro zone purchasing managers data.

"The (FX) turnaround is clearly in risk aversion," said Colin Asher, currency economist at Nomura, pointing to stocks.