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TOKYO, Aug 1 (Reuters) The yen hovered near a three-month high against the dollar on Wednesday as a sharper deterioration in global credit and stock markets prompted investors to cut back on risky carry trades.

Market players shed higher-yielding currencies and turned cautious as Asian markets took a hit following more losses on Wall Street, with South Korea's KOSPI sliding 5 percent at one point and regional credit spreads blowing wider.

Many investors have built up large short positions in the low-yielding yen to fund purchases of higher-yielding currencies in the carry trade, which typically performs well as long as financial market moves stay subdued.

''This makes the market nervous and people starting buying yen,'' said Tohru Sasaki, chief foreign exchange strategist at JP Morgan Chase in Tokyo.

The Australian dollar gave up gains and fell despite strong retail sales data that underscored expectations for Australia's central bank to raise interest rates to an 11-year high of 6.50 percent next week.

But Sasaki said the yen's rise against the dollar would likely be limited if U.S. investors start repatriating funds as they have done in previous periods of financial market stress, such as in May and June last year.

The dollar dipped 0.1 percent from late U.S. trade to 118.29 yen pulling back from a day's high of 118.72 yen and near a three-month low of 118.02 yen hit on electronic trading platform EBS on Friday.

The euro fell 0.2 percent to 161.50 yen dragging the single currency down 0.1 percent to $1.3664.

The Australian dollar shed 0.4 percent to $0.8474 and 0.5 percent to 100.23 yen near a two-month low hit earlier in the week just below 100 yen.

Gains in the low-yielding yen were also kept in check by Japanese retail investors buying foreign currencies, said Sean McGoldrick, head of forex trading at Morgan Stanley in Tokyo.

''There's been no real evidence of the margin retail trading pulling back. During the Asia time we've continued to see the yen weaken for the most part,'' McGoldrick said, referring to the yen's moves over the past few weeks.

Japanese traders with margin accounts on the Tokyo Financial Exchange boosted their net long positions in seven foreign currencies against the yen to a record 397,968 on Tuesday.

EYES ON EQUITIES U.S. shares resumed their slide on Tuesday after mortgage lender American Home Mortgage Investment Corp. said it could not fund home loans and might have to liquidate assets.

In a sign of the continuing turmoil in credit markets, Bear Stearns, recently embarrassed by the collapse of two hedge funds, said on Tuesday it had halted redemptions in a third hedge fund after investors wanted to pull out their money.

Shares of Australia's Macqaurie Bank fell more than 10 percent after it warned investors of losses in two bond funds after the credit market troubles in July.

Risk aversion stemming from the tumult in global equities and credit markets could prompt the dollar to eventually break below 118.00 yen, said a trader for a major Japanese trading house.

''This credit market turmoil can't be taken lightly,'' the trader said. ''Direction-wise, I think we will see another big move down.'' In the near term, the focus will be on whether the dollar finds support near 118.00 yen as it did this week and late last week on buying related to a large currency options position, said the Japanese trading house trader.

REUTERS SR GC1131