* Dollar rapidly sheds more than half a yen, as stops triggered
* Dollar index edges away from this week's two-month highs
* Fed Chair Yellen planned speech on Friday
By Patrick Graham
LONDON, May 26 (Reuters) - An early surge in the yen in Asia on Thursday put a dampener on any further progress for the dollar after a bullish two weeks and spurred speculation U.S. investors are opposing any gains past 110.50 yen.
In relatively illiquid conditions in the first minutes of trading in Tokyo, a large order drove the yen more than half a percent higher against the dollar, undoing the bulk of this week's gains for the U.S. currency.
Two dealers with banks in London, asking not to be named, said the yen now seemed to be pinned between around 107 and 110.50 yen per dollar, with the top side guarded by substantial interest that also drove the dollar back last week.
While Japanese authorities are not intervening on the currency at this stage, most traders believe officials might be forced to were the yen to strengthen to closer to 100 yen.
U.S. officials, for their part have been the most vocal in the Group of Seven advanced economies in opposing any outright moves by Tokyo to weaken the yen.
"Stuck in a corridor is a good word for the yen at the moment," said Geoffrey Yu, a strategist with the UBS in London, though he played down any suggestion that Washington was overly concerned about the yen's value.
"For Japan the question is what will we see next from them to ensure that the yen can stay weak," he said.
In early trade in Europe, the yen was up 0.3 percent at 109.90. The dollar was 0.1 percent weaker against a basket of currencies.
Traders await a speech by Federal Reserve chief Janet Yellen on Friday for signs on how much she backs the hints of a number of her colleagues in the past fortnight that the U.S. central bank could be on course to raise interest rates in June or July.
China's yuan is down 1 percent this month on the back of the adjustment in U.S. rate expectations that has spurred, back under pressure for the first time since February. It steadied around 6.56 per dollar on Thursday, having traded as weak as 6.58 last week.
The euro was marginally lower at 122.80 yen after tumbling as low as 122.25 from a session high of 122.93. The Australian dollar was down 0.3 percent at 79.05 yen after sliding to 78.49 from a high of 79.31.
In addition to talk of currency intervention, investors have been eager for any developments about the timing of Japan's sales tax increase.
Japanese Finance Minister Taro Aso said on Wednesday that he told his G7 counterparts at a finance leaders' meeting last week that Japan will raise the tax as planned. But he did not say whether that meant Japan had officially pledged to the international community that it would go ahead with the increase.
Japan's top government spokesman on Wednesday denied a newspaper report that Prime Minister Shinzo Abe is likely to delay the sales tax hike now scheduled for next year.
Delaying the tax increase would support Tokyo's stock market, which traditionally weakens the yen.
"The sudden move (in the yen) shows how jumpy everyone is," said a trader at a foreign bank in Tokyo. (Additional reporting by Lisa Twaronite)