FOREX-Dollar caps worst week in 24 years

* Dollar rebounds but still suffers worst week since 1985

* Euro gains more than 5 percent vs dollar on week

* Euro zone industrial output falls, trimming euro gains

* ECB under pressure to follow Fed, other central banks (Recasts, adds comment, updates prices, changes byline)

By Steven C. Johnson

NEW YORK, March 20 (Reuters) - The dollar rebounded on Friday but still recorded its biggest weekly slide since 1985 as the Federal Reserve's plans to buy long-term government debt stoked fear about the erosion of the U.S. currency.

The Fed shocked financial markets this week when it said it would buy some $1 trillion of government and mortgage-backed debt in a bid to cut interest rates and kick-start lending.

Anticipating an oversupply of dollars, traders sold the greenback broadly. The euro hit a two-month high above $1.37 en route to its biggest daily gain since its 1999 launch.

The dollar clawed back some of its losses on Friday, but against a basket of currencies.DXY it still notched its biggest weekly plunge since the 1985 Plaza Accord, when major economies agreed to a formal depreciation of the greenback.

"I think we will look back at this week and see it as seminal one because the Fed changed the way markets perceive monetary policy and the dollar," said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.

But while the dollar has taken a hit, he said a severe global recession will continue to hurt other countries and their currencies, too. "That means we'll see a lower range for the dollar rather than a total meltdown, which is what the market is getting its head around today."

The euro fell 0.7 percent on Friday to $1.3563 EUR=, after hitting a peak of $1.3737 on Thursday, its highest level since early January. At current prices, the common currency was up more than 5 percent from last Friday's $1.2922 close.

Data showing euro zone industrial output fell in January for a fifth straight month underscored the economy's woes and chipped away at the euro's recent gains [ID:nBAE001626].

The dollar was up 1.5 percent at 95.87 yen JPY but down 2.2 percent on the week, while sterling fell 0.5 percent to $1.4439 GBP= but ended the week 3.4 percent firmer.

PRESSURE TURNS TO ECB

Moran said a weaker dollar will cause headaches for other economies, including in Asia and Europe, as it lifts the value of their currencies in a recession and raises deflation risks.