(Updates with China close, fresh quote)
* PBOC sets yuan mid-point at weakest since Oct 2012
* Lower U.S. yields pushes dollar lower
* Markets ponder chances of Fed hike after China's move
By Anirban Nag
LONDON, Aug 12 (Reuters) - The dollar fell 0.7 percent against a basket of currencies on Wednesday, pulled down with Treasury yields by doubts over whether the U.S. Federal Reserve will raise interest rates given China's devaluation of the yuan.
The yuan extended losses, dragging the growth-linked Australian and New Zealand dollars to six-year lows with it, while another set of weak Chinese data bolstered safe-haven currencies such as the yen and the Swiss franc.
The euro rose, helped by the unwinding of euro-funded carry trades in the yuan and other emerging market currencies. The euro hit a one-month high of $1.1158, up 1 percent on the day. The dollar index fell to 96.42, while the greenback shed 0.5 percent to trade at 124.42 yen .
"There are some question marks being raised about the timing of the Fed hike," said Niels Christensen, FX strategist at Nordea. "The euro is squeezing higher against the dollar, as Treasury yields drop."
In China, the spot yuan fell to 6.4510 per dollar , its weakest since August 2011, after the central bank set its daily mid-point reference at 6.3306, even weaker than Tuesday's devaluation. In international trade it touched 6.5943 yuan per dollar, its lowest since early 2011.
Traders in Shanghai said Chinese state-owned banks were selling dollars on behalf of the central bank, which was intervening to keep the yuan around 6.43 against the dollar.
The PBOC surprised markets on Tuesday by aggressively lowering its guidance rate, pushing the yuan down nearly 2 percent.
The Aussie, widely considered a more liquid proxy for China plays, was trading steady at $0.7300, after plunging to $0.7217, its lowest since mid-2009. The New Zealand dollar also fell to a six-year low while the Norwegian crown fell to a 7-month low against the euro.
Chinese data released on Wednesday underscored Beijing's need to prop up its economy. Factory output rose 6.0 percent in July from a year earlier, falling short of forecasts as did fixed-asset investment and retail sales.
China's uncertain economic outlook and the move to devalue the currency fuelled questions about the timing of the Fed's long-awaited increase in interest rates, which many still believe could come as early as next month. A rise in interest rates by the Fed will tend to push the dollar higher.
Nevertheless, Treasury yields dropped and weighed on the dollar. The benchmark 10-year note yield slipped to 2.045 percent, compared with its U.S. close of 2.139 percent.
"If there is a fresh currency war in the Asian region, the upward trend in the United States' effective exchange rate will likely find new momentum," said Jane Foley, senior currency strategist at Rabobank.
"The resultant tightening in monetary conditions in the U.S. may give the Fed reason to delay its first hike. This strengthens our expectation that the Fed may not hike until December." (Additional reporting by Lisa Twaronite; Editing by Ruth Pitchford)