* Dlr falls vs euro and Swiss franc on Middle East tensions
* Sterling hovers near record low vs euro, eyes parity
* Yen expected to stay strong vs dollar in 2009
By Kaori Kaneko
TOKYO, Dec 30 (Reuters) - The dollar dropped on Tuesday as the Israeli attacks on Hamas raised concerns about oil supplies in the Middle East and spurred buying of traditional safe-havens like the Swiss franc and gold.
The dollar was repeating declines made a day earlier on Israel's attacks on Gaza, but which were later regained after investors covered short-positions in thin trade.
Analysts said they expect the conflict to continue to exert pressure on the greenback.
"The market's focus is shifting from the unwinding of yen carry trades and U.S. financial worries to geopolitical risks," said Toru Umemoto, chief FX strategist at Barclays Capital.
"But as there are fewer market participants now, the market has not yet fully digested those risks," he said.
Investors have generally sought shelter in the dollar in times of geopolitical risks. But this has changed recently as the recession in the United States has deepened and government bond yields have fallen to record lows.
Israeli warplanes on Tuesday continued to attack targeted Hamas government buildings and other symbols of the Islamist group on the fourth day of the fiercest air offensive in Gaza in decades, with the Palestinian toll from the onslaught rising to over 300 dead and more than 800 wounded.
The euro rose 1 percent against the dollar from late U.S. trading on Monday to $1.4114.
The dollar declined 0.8 percent against the Swiss franc to 1.0525 francs, and slipped 0.3 percent against the yen to 90.26 yen.
Sterling slipped 0.7 percent against the euro from late U.S. trade on Monday to 97.24 pence. On Monday, sterling hit a record low of 98.00 pence, according to Reuters dealing system data.
It is nearing parity on expectations that the bleak outlook for the UK economy will mean more aggressive rate cuts than in the euro zone.
Japan's stock and bond markets finished this year with a half day trading on Tuesday and will reopen on Jan. 5, which will also be another half day of trade.
YEN EYES RECORD PEAK IN 2009
The yen has risen roughly 19 percent against the dollar this year according to Reuters data, its biggest annual percentage gain since 1987 when it jumped 23 percent against the greenback.
The yen rallied this year as the global credit crunch and worries of a deep worldwide recession prompted investors to unwind risky carry trades, in which low-yielding currencies like the yen are sold to invest in higher-yielding currencies and assets.
The dollar extended its losses against the yen earlier this month, hitting a more than 13-year low of 87.13 yen on trading platform EBS, after the U.S. Federal Reserve slashed key interest rates to a range of zero to 0.25 percent.
"Since there is hardly any interest rate differential between Japan and the United States, and the United States is under a heavy debt burden, the trend of yen strength against the dollar is expected to continue," said Yuji Saito, head of the FX sales department at Societe Generale.
Saito said the dollar could fall below its post-World War Two low of 79.75 yen hit in 1995 and slide to as low as 75 yen in 2009.
But the dollar may rise against the yen around the third quarter of next year, as economic stimulus steps expected under President-elect Barack Obama's new administration may start to have an impact from around then, Saito said.
The upper end of the dollar's trading range against the yen next year is likely to be around 110 yen, he added. (Additional reporting by Masayuki Kitano, Eric Burroughs; Editing by Chris Gallagher)