* Euro falls to lowest in more than 3 months vs dollar
* Fall in Aussie dollar triggers euro break
* Dollar also firm on yen as domestic politics weigh
* Dollar index hits fresh 3-year high
TOKYO, March 4 (Reuters) - The dollar climbed to its highest in more than three months against the euro on Wednesday and forged a three-year high against a basket of currencies as a drop in the Australian dollar set off a chain reaction of selling.
The yen edged lower as the arrest of a close aide to Japan's opposition leader in a fund-raising scandal clouded an already uncertain political picture in an election year.
But the catalyst for the dollar's push came from Australia, where figures showed the economy unexpectedly contracted for the first time in eight years last quarter, sending the Australian dollar tumbling and taking the euro with it.
"The euro was dragged down by selling in the Aussie following the release of Australia's GDP data," said a senior trader at a big Japanese bank.
"The fall in the euro picked up pace as the European single currency broke key technical support at the $1.25 level."
The euro fell as far as $1.2455 on trading platform EBS to its lowest in more than three months, before ticking back up to $1.2483 to stand 0.6 percent down on the day.
The dollar index climbed to a fresh three-year peak at 89.624, fast approaching 89.90, which would mark a 38.2 percent technical retracement of its long-term decline from 2001 to 2008.
The Australian dollar tested its lowest levels in more than a month at $0.6285.
The yen pared early losses after opposition Democratic Party leader Ichiro Ozawa said on Wednesday he would not resign over the arrest of a close aide in a fundraising scandal.
Political analysts had said the arrest of the aide, who also managed accounts at a political group supporting Ozawa, could prompt the leader to resign and upset predictions of an opposition victory in an election that must be held by October.
The yen has already lost favour after Japan's finance minister resigned last month and as the economy, which many had once expected would weather the global economic storm the best, is struggling with a collapse in export markets and mass lay-offs.
The dollar gained 0.2 percent to 98.34 yen, edging closer to last week's recent high of 98.72, which was its strongest level since early November. (Reporting by Charlotte Cooper and Rika Otsuka; Editing by Chris Gallagher)