* Euro at six-week low vs dollar in broad market sell-off
* Italian official says national currency would solve problems
* Dollar rallies across the board
* Yen, Swiss franc gain as markets slide
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Adds quote, updates prices)
By Tommy Wilkes
LONDON, Oct 2 (Reuters) - The euro fell to a six-week low on Tuesday after a senior official from Italy’s ruling party said most of the country’s problems would be resolved if it scrapped the euro for a national currency, triggering a broad market sell-off.
The euro also slumped against the safe-haven yen and Swiss franc, while the dollar surged to a one-month high as investors piled into greenback and sold riskier assets such as equities.
Markets are highly sensitive to Italian political developments after the ruling parties proposed a budget with a higher-than-expected deficit target, exacerbating tensions with other euro zone leaders and worrying investors who want Rome to bring its debt under control.
The euro’s weakness combined with a further push higher by the dollar, which is regaining its stride despite investor positioning in the greenback looking stretched.
The single currency skidded to as low as $1.1507, its weakest since Aug. 21. Against the yen, the euro fell 0.9 percent to 130.80 and tumbled 0.6 percent versus the Swiss franc to 1.1317 francs.
“We are dealing with a war of words, with the euro on one side and Italy on the other ... There’s a lot of headline risk about,” Credit Agricole head of G10 FX Strategy Valentin Marinov said.
Marinov said he did not expect the situation in Italy to weigh heavily on the euro in the medium term because there was “no real evidence of contagion” that would worry the European Central Bank and prompt it to postpone a gradual end to its fiscal stimulus.
Most of the euro’s losses came after Claudio Borghi, the economic head of the ruling League party, said Italy would enjoy more favourable economic conditions outside the euro zone.
Borghi later rowed back on the comments, and said Italy’s government had no intention of leaving the euro.
Italian Deputy Prime Minister Luigi Di Maio, who accuses European Union officials of deliberately upsetting financial markets with negative comments about Italy’s budget plans, also said Italy would not change its budget deficit targets.
Commerzbank analysts said that even if the EU did not reject Italy’s budget, it could still act as a hurdle for the euro, especially as some analysts expect credit ratings agencies to downgrade Italy’s government debt.
“Even if the subject (of Italy) seems to remain on the back burner for the FX market at present, market participants should keep a close eye on it. It can cook up more rapidly than we think,” they said.
The dollar index rose 0.4 percent to 95.684, a one-month high.
Fears about trade conflicts between the United States and major trading partners, including China, have lifted the dollar this year, as has an increasingly confident U.S. Federal Reserve especially as the U.S. central bank looks increasingly alone in tightening policy.
Against the yen, the dollar fell 0.3 percent to 113.74 yen on the Japanese currency’s safe-haven status.
The U.S.-Canada trade deal announced on Monday had sent the yen to an 11-month low of 114.06 per dollar as the agreement boosted investor appetite for taking risks.
The Australian dollar - often viewed as a barometer of risk appetite - fell 0.9 percent $0.7162 as markets worldwide sold off on the euro zone concerns.
The Reserve Bank of Australia announced it had held interest rates at 1.5 percent, a widely expected decision.
The Canadian fell 0.2 percent to C$1.2834 per dollar, reversing some of its gains the previous day. (Editing by Louise Ireland)