* Dollar stalled as investors look to U.S. stock futures
* Sterling extends loss vs euro; outlook wobbly
* Bini Smaghi comments sap some euro strength
* Yen erases earlier losses to rise vs dollar
(Changes dateline, byline, adds quotes, updates prices)
By Veronica Brown
LONDON, March 10 (Reuters) - The dollar fell against a basket of currencies on Tuesday, retracing much of the previous day's sharp gains as investors focused on U.S. stock market futures that pointed to a stronger start for Wall Street.
A tentative easing of wariness towards risk allowed the euro a technical bounce against the dollar, while sterling lengthened losses versus the common currency on continued worries about Britain's banking sector.
The yen erased losses and rose versus the dollar, though doubts about its status as a safe port in the global economic storm ensured it kept an overall defensive tone, traders said.
"The euro seems a bit stronger against most currencies today, particularly against the dollar, probably on expectations of positive U.S. stock markets," John Hydeskov, senior FX analyst at Danske Bank in Copenhagen.
The dollar index, a gauge of its performance against six major currencies, fell 0.9 percent to 88.492, off last week's three-year high of 89.624.
The euro rose 0.8 percent to $1.2712, rebounding from a three-month low of $1.2457 hit last week. The euro was also firmer against sterling at 91.73 pence, off a 5-1/2 week high of 92.18 pence.
U.S. stock market futures pointed to a stronger Wall Street open. Citigroup shares were in focus after a memo from Chief Executive Vikram Pandit obtained by Reuters said it was profitable in the first two months of 2009 and confident about its capital strength.
The euro's gains versus the dollar were dented slightly after ECB Executive Board member Lorenzo Bini Smaghi was quoted as saying the bank was prepared to cut interest rates to zero if deflation threatens and the economic situation worsens.
"The comments are dovish, but they continue to put some distance between themselves and any possible quantitative easing ... They continue to dismiss an outright ECB intervention in the bond market," said Richard McGuire, fixed income strategist at RBC Capital Markets in London.
WOBBLY POUND
The pound managed to recover from a six-week low against the dollar, rising 0.7 percent on the day to $1.3824.
But the rebound was on shaky ground after it shed 2 percent on Monday when banking sector worries intensified as Lloyds Banking Group said the British government was taking a stake in it of up to 77 percent.
Pressure from the Bank of England's quantitative easing programme was also reflected in bond markets as the yield on benchmark 10 year gilts fell below 3 percent for the first time in more than 50 years on Monday.
"We are in a situation where sterling is perceived as a weak currency, with economic news regularly confirming a pessimistic view on the UK as an economy that is struggling," said Chris Gothard, currency strategist at Brown Brothers Harriman in London.
The yen reversed earlier losses against the dollar to rise 0.3 percent to 98.45 yen, but stayed weaker versus a broadly stronger euro at 125.09 yen.
The Japanese unit has fallen in the past month as Japan's economy grapples with diving exports and its worst recession of the postwar era.
The current account balance swung to its largest deficit on record in January, adding to selling pressure.
Market participants say foreign investors have been reducing long positions in the yen, with expectations fading that it can surpass a 13-year peak of 87.10 yen per dollar hit in January.
Recessions in many of Japan's export markets have dried up overseas demand for its goods, meaning exporters also have fewer dollars to sell in exchange for yen, traders say.
(Additional reporting by Jessica Mortimer and Naomi Tajitsu in London)
(Reporting by Veronica Brown; Editing by David Stamp)