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TOKYO, July 23 (Reuters) The dollar hit a record low against the euro on Monday and more than 20-year lows versus sterling and the New Zealand dollar on worries that problems in the U.S. subprime mortgage sector may trickle into the broader economy.

The yen zigzagged, recovering from a record low hit against the euro in early trading, and touched a six-week peak against the dollar of 120.80 yen on electronic trading platform EBS as some traders unwound risky carry trades.

But in the end, much of the yen's gains were short-lived, as the high-yielding currencies of Australia, Canada and New Zealand as well as sterling continued to climb on the belief that rates in those countries will keep rising.

The yen had rallied on Friday, when a fall in U.S. equities dampened investors' appetite for risk, prompting an unwinding carry trades, which involve selling low-yielding currencies such as the yen to invest in higher-yielding currencies and assets.

But traders said further gains may be difficult as investors continue to chase higher yields, and that the dollar remained well supported around the technically crucial 120.70 yen level.

''If there's further risk reduction, we could see (the 120.70 yen level) taken out, but if not, we could see bets placed on dollar/yen again,'' said Sean McGoldrick, head of forex trading at Morgan Stanley in Tokyo.

''Global risk appetite will determine where dollar/yen is going at the moment.'' The euro inched up 0.1 percent to $1.3840 hovering near a record high of $1.3846 struck earlier on Monday on EBS.

The New Zealand dollar climbed as high as 80.13 U.S. cents its strongest level since the country floated the currency in 1985, as investors expect the Reserve Bank of New Zealand to lift its cash rate to 8.25 percent on Thursday.

Sterling climbed to a 26-year high of $2.0604 as many investors expect that the Bank of England will lift rates to 6.0 percent by year-end from 5.75 percent at the moment.

Defaults on subprime mortgages, made to borrowers with weak credit, and mounting losses on bonds backed by such debt have rattled financial markets and soured general dollar sentiment.

The euro fell around 0.25 percent to 167.25 yen having pared gains after surging to a record high of 169.05 yen on EBS early on Monday.

YEN ZIGZAGS The dollar fell 0.30 percent to 120.85 yen holding near a six-week low. The dollar had jumped to around 122.20 yen in early Asian trading, only to give up those gains.

''It seems like there is some risk reduction taking place, I guess some unwinding of yen carry trades,'' said Yuji Matsuura, joing general manager for Aozora Bank's forex and derivatives trading group.

Traders said the yen's initial slide may have partly been due to newspaper polls published on Monday that showed that Japanese Prime Minister Shinzo Abe's ruling camp looked set to lose a July 29 upper house election after falling further behind the opposition. For details, click on Some market participants said that the yen may come under more selling pressure this week, particularly if the market regains its appetite for risky trades.

McGoldrick at Morgan Stanley said that a poor showing by Abe's coalition in this week's election, coupled with ongoing yen-selling demand from retail investors, may push the dollar/yen towards 124 yen by the end of the month.

Short covering on Monday initially boosted the yen against high-yielding currencies like sterling and the Australian and New Zealand dollars but the low-yielding yen remained weak after hitting its lowest level in as many as 21 years against those currencies late last week.

The currency matching system of news and information provider Reuters Group Plc suffered a temporary outage on Monday, forcing some traders to switch to alternative venues or trade over the phone.

The outage hobbled trading in currencies primarily traded over the Reuters platform for much of the Asian session, affecting trades in sterling and the Australian New Zealand and Canadian dollars.

REUTERS SR DB1249