* Dollar, yen fall as AIG rescue revives risk appetite
* Fed to give AIG $85 bln loan, take 80 percent stake
* Markets still choppy; underlying banking worries persist (Recasts, changes byline, dateline, previous LONDON)
By Lucia Mutikani
NEW YORK, Sept 17 (Reuters) - The U.S. dollar and yen fell on Wednesday as the U.S. government's rescue of insurer American International Group <AIG.N> revived risk appetite, encouraging traders to unwind some safe-haven trades.
However, analysts reckon that while the emergency $85-billion loan to AIG from the Federal Reserve and a rebound in crude oil prices had taken some luster off the dollar, the jury was still out on whether the step was enough to calm jittery financial markets.
They believe the dollar will resume its upward trend, with attention reverting to a deteriorating global growth picture.
"The government's lifeline to AIG has temporarily boosted risk appetite and we are seeing some unwinding of some of the safe-haven positions that we have seen over the past week or so," said Omer Esiner, a senior currency analyst at Ruesch International in Washington.
"The dollar had benefited from safe-haven capital flows into U.S. Treasuries and we are seeing a little bit of an unwinding of that. The tentative increase in risk appetite is hurting the dollar and the yen."
In New York morning trade, the ICE Futures U.S. dollar index was down 0.2 percent at 78.967 <.DXY>. The index, which measures the dollar's value against a basket of six currencies, dropped as low as 78.536 in overnight trade.
The euro last traded up 0.3 percent at $1.4163 <EUR=>, after earlier rising as high as $1.4269. The European single currency gained 0.3 percent to 148.87 yen <EURJPY=>.
Against the yen, the dollar last traded down 0.6 percent at 105.10 yen <JPY=>, but well away from near four-month lows seen on Tuesday around 103.51 yen, according to Reuters data.
INVESTORS JITTERY
Despite the AIG bailout, investors remained jittery as volatile equity markets reflected a strong sense of unease about financial sector health.
Stocks on Wall Street opened sharply lower and that added to some pressure on the dollar. Analysts also noted that liquidity conditions in the market remained thin and interbank money markets remained stressed.
Overnight dollar funds were borrowed at rates as high as 8 percent earlier in the European session, according to Reuters data, before easing back later in the session.
"The U.S. dollar is being influenced by market conditions created by concerns about credit. Liquidity is low and market participants appear only to be transacting business that needs to be done or that is forced upon them by stops," Brown Brothers Harriman said in a note.
The dollar was little moved by data showing that construction starts on new U.S. homes plunged to a 17-1/2-year low in August and the current account deficit widened in the second quarter. For details see [].
The U.S. Federal Reserve elected to leave interest rates on hold on Tuesday at 2 percent, citing concerns about downside risks to growth and upside risks to inflation.
Elsewhere, Britain's economic backdrop continued to show deterioration with data released earlier showing that the numbers of jobless in Britain leapt by 32,500 in August, its biggest rise since December 1992.
The euro rose 0.1 percent to 79.24 pence <EURGBP=>, while sterling gained 0.1 percent to $1.7885 <GBP=>.
Minutes of the Bank of England's latest policy meeting showed 8 of 9 policymakers voted to leave borrowing costs on hold at 5 percent, with one policymaker calling for a 50 basis point cut while a hike was also discussed.
(Editing by Chizu Nomiyama)
