TOKYO, Jan 25 The yen climbed against the dollar and major currencies on Thursday after r

TOKYO, Jan 25 (Reuters) The yen climbed against the dollar and major currencies on Thursday after reports the previous day said European officials want to complain over the Japanese currency's weakness at next month's Group of Seven meeting.

The reports prompted more market players to cover the big short positions in the yen that have built up in the past few weeks as the Japanese currency tumbled to a record low against the euro and a four-year low against the dollar.

Next Monday, Euro zone finance ministers will draft a common position for the G7 gathering that will include a more forceful message that the yen is too weak, a source close to the preparations told Reuters on Wednesday.

Speculation has stirred before the meeting of G7 finance ministers on Feb. 9-10 that the yen's sharp slide that has also driven it to decade lows against the Australian dollar would provoke complaints from other countries.

''At this juncture, we prefer to be cautious into the G7 meeting as sideline comments on yen weakness ... may gain traction,'' said currency strategists at Morgan Stanley in a note to clients.

The dollar slipped to 120.97 yen from near 121.20 yen in late New York trade, holding off a four-year peak of 121.80 yen struck earlier this week.

The euro slipped to 156.80 yen from 157.20 yen, down sharply from an all-time high of 158.62 yen struck on Thursday.

The single European currency edged down to $1.2960 from $1.2970.

At the last G7 meeting in Singapore, Japan's finance minister and European officials seemed to make coordinated comments that the yen should reflect Japan's economic recovery, but the talk did little to stop the Japanese currency's fall.

The yen's sell-off accelerated this month after the Bank of Japan held interest rates steady at 0.25 percent, suggesting rates would rise even more slowly than expected.

Market players have used the low-yielding yen as a source of funds to buy higher-yielding currencies in the carry trade.

Some carry trades started to unravel after data showing a surprise drop in Australian inflation the previous session signalled that rates may have peaked at 6.25 percent, sparking a sell-off in the Australian dollar -- a popular choice for such trades.

REUTERS PDS RN0737