(Corrects euro move vs franc in 2nd paragraph)
* Swiss franc drops broadly after SNB sets EUR/CHF target rate
* Euro jumps more than 8 pct above 1.2200 francs, dollar/Swiss jumps to 0.8579
* SNB's resolve will be tested as safe-haven inflows strong
By Anirban Nag and Naomi Tajitsu
LONDON, Sept 6 (Reuters) - The Swiss franc plummeted versus the euro and dollar on Tuesday, after Switzerland's central bank shocked markets by setting a floor for the euro/Swiss exchange rate in an effort to curb franc strength which has taken a toll on the economy.
The euro rocketed nearly 0.1 francs after the Swiss National Bank set a rate target of 1.20 francs to the euro and said it would enforce it by buying foreign currency in unlimited quantities.
However, many analysts questioned whether the move could succeed given the robust demand for safe-haven assets that drove the franc to record highs last month.
Within minutes of the announcement, the euro leapt to 1.22 francs on trading platform EBS, its highest since early July and up 10 percent on the day. It pulled back to 1.2040, but was still on track for the biggest daily percentage move in a major currency pair in recent memory.
The dollar also jumped to 0.85799 francs from around 0.8000, while the euro rose to $1.4286 , up more than 1 percent on the day after trading almost flat beforehand. It was last up 0.6 percent at $1.4172.
"The SNB's move is somewhat sudden and aggressive," said Paul Mackel, senior FX strategist at HSBC in Hong Kong.
"However, it needs to be aggressive to turn the tide for the Swiss franc and to take the shine off its safe-haven status. Putting euro/Swiss franc at 1.20 today is the easy part. Keeping it there or significantly above will be difficult if the world still looks like a gloomy place."
Some analysts were sceptical the SNB would be able to fight franc strength for long, as it faces huge losses on its balance sheet if it keeps the proceeds of franc selling in euros.
At the same time, tame Swiss inflation allowed the bank more leeway to keep the target in place for some time, as a weaker currency was unlikely to fuel significantly higher price risks.
"The target is designed to be temporary in nature and will be removed as soon as the euro zone situation stabilises and a significant interest rate differential is established between the ECB and the SNB," said Geoffrey Yu, strategist at UBS.
"Nevertheless, this is far easier said than done and the SNB will remain beholden to external developments."
The latest SNB move comes after it cut its already low interest rate target to nil on Aug. 3. It also flooded the banking system with francs, effectively driving money market and forward rates deep into negative territory and making holding Swiss francs a costly proposition for investors.
EURO RISKS AHEAD
The Swiss franc has dropped roughly 20 percent versus the euro in the past month as the single currency has soared from a lifetime low of 1.0075 hit in early August.
As a result, fund managers who took on bets that the franc would fall around that time were sitting on hefty gains.
"From last month I thought it was time to get cautious on the Swiss franc," said Pierre Lequeux, head of FX management at Aviva Investors, adding he had entered a small bet in favour of the New Zealand dollar over the franc in the past few weeks.
"It's been an 18 percent move since we took out the position, which is not bad for a few weeks," he said, adding he had also taken a small long position in the Norwegian crown versus the franc. Aviva Investors's parent company, Aviva Plc, manages $371 bln in assets.
Morgan Stanley analysts argued in a note the SNB action was unlikely to help the euro much, and could even increase market speculation the European Central Bank would become less hawkish and prepare the ground for rate cuts.
Market players said the key risk for the euro this week was that the ECB would signal a pause in its rate hike cycle.
Concerns the next tranche of bailout funds for Greece may be delayed, worries about European bank funding and rising Italian government bond yields on speculation Rome may struggle to implement new austerity measures kept the euro under pressure.
The dollar rose against the yen on speculation the SNB's measures could encourage the Japanese authorities to intervene in coming days. The dollar was up 0.3 percent at 77.11, off a record low of 75.94 struck on Aug 19.
"The SNB's move has created some paranoia about central bank intervention and some speculative positions could be cut," said Lequeux at Aviva.
The dollar index rose 0.2 percent on the day to 75.249, having earlier climbed to a one-month high at 75.305. (Additional reporting by Nia Williams,; Graphics by Scott Barber, editing by Nigel Stephenson)