FOREX-Euro up vs dollar, yen in holiday-thinned market

* Euro recovers, hovers above $1.40 EUR=

* Yen weakens in wake of Friday’s BOJ rate cut

* Extreme risk aversion retreats after U.S. auto bailout

* ECB policymakers divided on near-term policy action

(Releads, changes dateline prvs TOKYO)

By Tamawa Kadoya

LONDON, Dec 22 (Reuters) - The euro rose on Monday, recovering against the dollar in holiday-thinned trade, while the yen fell after the U.S. bailout plan for automakers quelled some extreme risk aversion.

The yen struggled across the board following the Bank of Japan’s decision to cut interest rates to near zero last week which further reduced the currency’s already low yield to 0.1 percent.

The euro had posted its biggest daily percentage loss against the dollar in almost two months on Friday, with traders saying the U.S. currency’s slump after the Federal Reserve’s interest rate cut to near zero earlier in the week was probably overdone.

Dealers said the U.S. rescue of General Motors Corp GM.N and Chrysler LLC [CBS.UL] had averted a crisis for now, but uncertainty remained over the companies' restructuring plans in return for the bailout would impact the economy already in a deep and long recession [ID:nPEK94492]

“The auto industry bailout removed one risk factor for the market, but the majority of market players see corporate profits to decline significantly in coming quarters,” said Geoffrey Yu, strategist at UBS in London.

“We see more risks and more agggressive action from policymakers as the economic situation is not improving.”

By 0854 GMT, the euro rose 1 percent to $1.4065 EUR= after falling to as low as $1.3824 on Friday, according to EBS. It climbed to $1.4720 on EBS on Thursday, its highest since late September.

Against the yen, the euro was up 1.6 percent at 126.01 yen EURJPY=

Recent comments by European Central Bank policymakers have suggested the central bank may be divided on the near-term course of action on rates.

ECB council member Miguel Angel Fernandez Ordonez said in an interview on Sunday that the ECB is likely to cut interest rates next month if inflation expectations are well below its 2 percent target.

But ECB Executive Board member Lorenzo Bini Smaghi warned about the risks of monetary policy being too lax, according to Rome daily Il Messaggero. [ID:nLL383892]

The yen retreated in the wake of the Bank of Japan’s rate cut on Friday, where it lowered benchmark interest rates close to zero.

BOJ Governor Masaaki Shirakawa said on Monday that Japan’s economy was deteriorating and conditions were likely to become more severe. [ID:nTKG003163]

That kept expectations intact for further monetary easing.

The dollar rose 0.6 percent to 89.86 yen JPY=, off a 13-year low of 87.13 yen touched last week.

Trading volume is expected to be light with many market players leaving for the Christmas holiday and ahead of Japan’s market holiday on Tuesday, making movements volatile. (Additional reporting by Satomi Noguchi in Tokyo; editing by Stephen Nisbet)