* G7 official says statement intended to signal concern on yen moves
* Statement on currencies initially cools currency war talk
* ECB Draghi says no such thing as a currency war
* Yen volatility spikes
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 12 (Reuters) - The yen rebounded on Tuesday, rising from a nearly three-year low against the dollar hit the previous session, after an official from the Group of Seven said a statement by the group was meant to express "concern about excess moves" in the Japanese currency.
Short-term volatility in the yen spiked in the options market following the G7 statement, rising to 13 percent as of the early afternoon session. If it stays at this level until the close, volatility would be the highest in 1-1/2 years.
The yen late on Monday plunged after U.S. Treasury Undersecretary Lael Brainard said the United States supports Japan's effort to end deflation and stimulate growth. But she clarified that Japan needed to adhere to its G7 commitments on market-determined exchange rates.
Her clarification though was not enough to slow the yen's slide. On Tuesday, there was more back and forth from the G7.
"The G7 statement was misinterpreted. The G7 statement signaled concern about excess moves in the yen," the official said on Tuesday. "The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend."
The official was referring to a meeting of the Group of 20 finance ministers in Moscow this Friday and Saturday.
The G7 said it remained committed to market-determined exchange rates and that fiscal and monetary policies must not be directed at devaluing currencies.
George Dowd, head of foreign exchange at Newedge in Chicago, said while he does not believe that there will be any statement condemning yen weakness, comments out of Japan for the rest of the week could further support the Japanese currency ahead of the G20 meeting.
"I would be surprised to see new highs in dollar/yen above 94.07 this week and thus would look for low risk spots to establish short trading positions in the short term."
The dollar last traded at 93.54 yen, down 0.9 percent on the day. That was below Monday's high of 94.42 yen, which was its strongest since May 2010. The greenback though has risen 7.8 percent against the yen so far this year.
BNP Paribas said its technical indicators suggested that the dollar was overvalued against the yen at current levels, with fair value estimated at 91.05 yen.
The euro fell 0.5 percent versus the yen to 125.91 yen. On Feb. 6 it hit a nearly three-year high of 127.71 yen.
The common currency has risen about 10 percent against the yen, leading to strong protests from some European leaders that a strong euro would hurt a fragile economic recovery.
The yen tumbled earlier in the global session after the G7 currency statement, as markets initially thought Japan had received a green light to continue efforts to reflate its economy.
"This sets us up for a very interesting G20 meeting later in the week," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
"But the scope for a major shift in policy as a result of statements is very limited, especially with the U.S., UK and Japan actively participating in currency devaluation."
Strategists said the yen's weakness, driven by the Japanese government's call for aggressive monetary easing to beat deflation, should persist and investors would buy the dollar and the euro on dips, making any yen rebound short-lived.
The euro was up 0.4 percent against the dollar at $1.3464 , benefiting from gains in the Europe's common currency versus the yen. Gains accelerated after European Central Bank President Mario Draghi said talk about currency war is way overdone.
He also said Spain was on the right track towards economic recovery.
Concerns about a bailout for Cyprus, a Spanish political scandal and Italy in the run-up to Feb. 24-25 elections are likely to check gains in the euro.
In European bond markets, Spain sold 5.6 billion euros of 6- and 12-month debt, beating the top end of the target amount, but paid a higher yield on the longer-term paper as a political corruption scandal weighed on shaky confidence.
Italy's debt costs also rose as it sold 8.5 billion euros of one-year paper.
In the United States, the focus will be on the evening's State of the Union address by President Barack Obama for any signs of a deal to avert automatic spending cuts due to take effect on March 1.
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