TOKYO, Aug 29 (Reuters) The yen extended its gains against major currencies on Wednesday as risk-wa

TOKYO, Aug 29 (Reuters) The yen extended its gains against major currencies on Wednesday as risk-wary investors were rattled by a stock market sell-off and a report showing Federal Reserve officials' worries about market conditions.

The dollar and euro lost more ground after sliding more than 1 percent against the Japanese currency the previous day as a renewed stock slide on Wall Street prompted more investors to cut back on risky positions such as carry trades.

Japan's Nikkei share average was down 2.7 percent in early trade, tracking the losses in U.S. equity indexes overnight.

The New Zealand dollar -- the bellwether of carry trades for its steep short-term yield -- fell nearly 1 percent against the yen and is approaching an 11-month low hit earlier in the month when market players bailed out of higher-yielding currencies.

Speculators had used the low-yielding yen as a cheap source of funds to buy higher-yielding currencies in the carry trade, but the flare-up of market volatility from U.S. subprime mortgage troubles has forced a sharp reversal of positions.

''The carry-trade unwind likely has further to run,'' said currency strategists at Citigroup in a note to clients, adding that they expect more gains in the yen and Swiss franc and losses in the Australian and New Zealand dollars as well as the pound.

The dollar fell 0.2 percent from late U.S. trade to near 114.00 yen retreating towards the 14-month low of 111.60 yen hit on electronic trading platform EBS earlier in the month.

The euro fell 0.3 percent to 154.70 yen while the single European currency dipped 0.2 percent to $1.3575.

The kiwi shed 0.75 percent to $0.6900 and about 1 percent to 78.70 yen.

The minutes of the Federal Reserve's early August meeting showed officials were worried then that a policy response may be needed to deal with worsening financial markets and that it may take some time before conditions returned to normal.

That meeting was held just before a squeeze in credit and money markets prompted the Fed to cut its discount rate for direct lending to banks and pump loads of cash into the banking system.

The Fed is expected to cut the benchmark fed funds rate by 25 basis points and possibly 50 basis points from the current 5.25 percent at its next meeting in September as the market strains and housing market woes threaten the economic growth outlook.

Reuters RKM VP0618