LONDON, Feb 27 The yen rallied against major currencies on Tuesday as falling global stoc

LONDON, Feb 27 (Reuters) The yen rallied against major currencies on Tuesday as falling global stocks, concern about Iran's nuclear programme and jitters ahead of key U.S. data prompted investors to unwind risky carry trades.

The dollar hit a two-month low against the euro, extending its grind lower ahead of U.S. home sales, durable goods and confidence figures which could fan concern about a slowdown in the world's biggest economy and a possible interest rate cut.

Geopolitical concerns, jitters about rising defaults among high-risk borrowers in U.S. sub-prime mortgages as well as falling Asian and European shares were some of the reasons which made investors wary of taking on risk and prompted them to buy back low-yielding currencies such as the yen and Swiss franc.

''The market is quite skittish. Carry had a very good run in February. Investors who had these positions were looking to lighten up before key U.S. data come out,'' said Paul Mackel, currency strategist at HSBC.

''It definitely throws a two-way risk into the market.'' Daragh Maher, currency strategist at Calyon, said: ''We see a decline in equity prices and there is a great tension surrounding it. There is a degree of nervousness.'' By 0845 GMT, the yen was up around 0.8 percent on the day at 119.42 per dollar, a one-week high, and rose 0.6 percent at 157.92 per euro.

The yen has wiped out all the losses made against the dollar after the Bank of Japan signalled last Wednesday it would be slow in raising interest rates.

The Swiss franc hit a two-month high of 1.2229 per dollar while it was up a quarter percent at 1.6172 per euro.

The euro hit a two-month high of $1.3230, up a third of a percent on the day.

Analysts said the yen also garnered support from comments by IMF Managing Director Rodrigo Rato that a weak yen and strong carry trades are affecting policies in countries from Asia to Europe. He added that circumstances should change over time as Japan moved to more normal monetary policy.

BUTTERFLY EFFECT Falling stock markets around the world are also hurting investors' risk appetite. Chinese stocks plunged almost 9 percent, their biggest drop in 10 years, while European equities were down more than 1 percent in early trading.

''Our assessment is based on the premise that we have now entered an environment where the trade-off between growth and inflation is much less favourable than it has been for over a decade -- the world no longer has much spare capacity,'' HBOS Treasury Services said in a note to clients.

''Cracks in the optimistic view still tend to be papered over but it is hard to escape the sense that they are multiplying in number.

Iran, U.S. sub-prime mortgages ... clumsy attempts to deflate the Chinese stock market: all are butterflies beating their wings.'' World powers agreed at a meeting in London on Monday to work on a new U.N. Security Council resolution to apply pressure on Iran over its nuclear programme while remaining committed to seeking a negotiated solution, British officials said.

Investors are also wary that a possible Federal Reserve interest rate cut later this year could take shine off the dollar's yield premium at a time when the European Central Bank is tightening monetary policy.

Traders awaited January figures on U.S. durable goods and February consumer confidence later in the session.

The focus was also on existing home sales for January, given growing concerns about riskier mortgage deals, some of which have gone awry in the housing market downturn.

A fresh round of fourth-quarter U.S. economic growth data are due on Wednesday, which analysts expect will be revised down to 2.4 percent from an earlier estimate of 3.5 percent.

REUTERS CS PM1538