* Sell-off in yen and dollar halts as market books profits
* Fed officials sound dovish, negative for dollar
* Extended Aussie, Canadian dollar rally finally pauses
* Sterling awaits UK inflation data for direction
By Hideyuki Sano
TOKYO, April 12 (Reuters) - The yen rose sharply on Tuesday and was the biggest gainer among major currencies over the past 24 hours as profit-taking on bets against it gathered momentum after Japanese authorities upgraded the nuclear crisis to a par with Chernobyl and several strong aftershocks hit Japan.
Declines in oil prices also prompted investors to exit positions in commodity-linked currencies.
The U.S. dollar, like the yen, found some reprieve as speculators locked in profits from positions taken against the low-yielding currency in favour of the euro and red-hot commodity plays such as the Australian dollar.
Traders said both the yen and the dollar will likely resume sliding, however, after the profit-taking has run its course.
"When there are uncertainties, you just close your positions. At the moment, what a lot of people have is yen short positions so the yen is being bought back. But I don't see any change in the yen's downtrend," said a trader at a U.S. bank.
The yen had been sliding after the Group of Seven (G7) countries sold the currency in last month's rare joint intervention -- their first in more than a decade.
Expectations that the Bank of Japan will keep policy loose to help the economy rebound from last month's devastating earthquake and tsunami, even as other central banks tighten to avert inflation, also had made many market players comfortable selling the yen, since higher yielding currencies tend to be favoured by investors in the long run.
As speculators bought back the yen, especially against higher-yielding currencies such as the Australian dollar and the euro, the yen gained about 1.0 percent against the dollar, about 1.2 percent against the euro and 1.6 percent against the Australian dollar.
The U.S. dollar fell to 83.80 yen per dollar
The euro slipped to 120.80 yen
"Aftershocks in Japan hampered overall risk sentiment, helping JPY to be the top performer overnight, even amid reports that the estimate of the severity of the Fukushima accident could be increased," said David Watt, strategist at RBC.
Japan raised the severity of its nuclear disaster to the highest level on Tuesday, citing accumulated levels of radiation released. [ID:nL3E7FB2TZ]
The U.S. dollar had the upper hand against other currencies, gaining 0.6 percent against the Aussie, 0.5 percent against the Canadian dollar and 0.2 percent against the euro.
EYEING INFLATION
The dollar index <.DXY >, which tracks the greenback against a basket of major currencies, posted a slim gain to stand at 75.111, having found support after plumbing a 16-month low of 74.838 on Friday.
The euro
The Australian dollar
But dovish comments from key U.S. Federal Reserve officials the previous day indicate that the U.S. Federal Reserve is not in any hurry to tighten its policy, likely limiting the greenback's upside potential in the near future.
Two of the Fed's most powerful officials, Janet Yellen and William Dudley, said on Monday that the U.S. central bank should stick to its super-easy monetary policy, arguing that inflation is not a threat and unemployment remains too high. [ID:nN11296347]
"With the Fed's accommodative policy intact for some time, USD weakness is likely to persist. Thus, the small correction seen across the board indicates more profit-taking than the start of a trend," BNP Paribas analysts wrote in a note.
Many traders also expect the yen to stay under pressure from low yields, after the knee-jerk reaction to the aftershocks has passed.
Kimihiko Tomita, head of foreign exchange at State Street Global Markets in Tokyo, said the yen's fall in the past month had been largely driven by speculators as many institutional investors typically need some time to assess their strategies after a big incident.
"We've seen unexpected factors such as Libya and the disaster in Japan. At a time like this, when there were sudden big changes, it is speculators and not investors who can quickly move," Tomita said.
"Foreign investors have bought Japanese shares for many years. If they start selling them, that could push down the yen further," Tomita added.
But Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp, said the yen could gain further against a broadly weak dollar if the G7 finance ministers' meeting shows a gap between Japan and other G7 partners on the G7 commitment to yen.
"Japan wants continued commitment to the yen but other G7 countries may want to limit joint intervention to a one-day event. If that picture is brought home to market players, the yen could test 80 yen," says Uno, one of the most dollar-bearish analysts.
Markets are next eyeing inflation data, with Germany, Spain and the United Kingdom among those releasing reports on Tuesday. U.S inflation data is due on Thursday and Friday.
In Britain, the annual consumer price inflation rate is forecast to hold steady at a 28-month high of 4.4 percent, more than double the central bank's target.
Another upside surprise would fuel talk of an imminent rate hike, giving sterling a fillip. The pound was down 0.3 percent at $1.6284