FOREX-Yen drops to more than two-year low vs dollar; euro on a tear

* BoJ to undertake further easing measures - sources

* Yen falls as Amari says remarks misinterpreted

* Technical break of 90 yen may confirm bullish dlr move

* Euro gains on strong Spanish debt sale and risk appetite

NEW YORK, Jan 17 (Reuters) - The yen plunged to a more than 2-1/2-year low against the dollar on Thursday, taking out a key technical barrier following news of potential measures being planned by the Bank of Japan to resuscitate the country's sluggish economy. The euro, meanwhile, advanced against the dollar, gaining after two days of losses, as a strong bond auction in Spain and Portugal's possible return to the fixed-income market appeased worries about the region's three-year-old debt crisis. The single currency also climbed to its highest in about 1-1/2 years against both the yen and Swiss franc. The dollar and euro gained significant value versus the yen after sinking for two straight sessions, returning to a trend that has been in place for several months. Citing sources familiar with the central bank's thinking, Reuters reported on Thursday that the BoJ next week will consider removing the 0.1 percent floor on short-term interest rates and commit to open-ended asset buying until the 2 percent inflation target is reached. "The report just confirms expectations of aggressive easing currency strategist at TD Securities in Toronto. "It's pretty dovish for the yen and that's why we have seen the yen hit new lows against the dollar and euro." The dollar rose as high as 90.10 yen, taking out an options barrier at 90. It last traded at 89.89, up 1.7 percent, marking the biggest rise since November 2011 when the pair notched gains of more then 3 percent after official BoJ intervention. TD's Moore said it's difficult to pick a top on dollar/yen given how fast the appreciation has been for the pair. But he noted that based on technical charts, there is a head and shoulders pattern evident at the 92-93 yen level. The yen had fallen earlier in Asian trade after Japan's Economics Minister Akira Amari was quoted as saying that his remarks on Tuesday about the negative impact of excessive yen weakness had been misinterpreted. On Tuesday, he had said a weak yen could hurt the livelihood of people by boosting import prices. The euro soared as high as 120.31 yen, its highest since May 2011. It last traded at 120.23, up 2.4 percent, its best daily gain since March 2011. It has so far been a banner year for the greenback and euro versus Japan's currency, notching a nearly 3.2 percent and around a 4.4 percent gain, respectively. The impressive appreciation follows dollar/yen and euro/yen gains of about 11.3 percent and roughly 14.3 percent in the fourth quarter. Strategists said increasing bets on aggressive policy easing policymakers meet on Jan. 21-22, when it is widely expected to adopt a 2 percent inflation target and perhaps extend the current asset purchase program. But the yen could rebound if the Bank of Japan falls short of matching market expectations for implementing a very loose monetary policy. Analysts also said the prospect of a yen recovery increases as the Japanese fiscal-year-end approaches. Japanese companies and investment houses tend to buy back the yen to square up positions for the end of the fiscal period. In a research note to clients, CIBC World Markets said central banks may also have to rebalance FX reserves, buying the yen to offset valuation losses. "As a result, the yen could stem its decline in the near term." The dollar, meanwhile, pared gains against the yen after U.S. data showed factory activity in the U.S. mid-Atlantic region unexpectedly contracted in January.. The U.S. data was a surprise for currency investors after better-than-expected numbers on jobless claims and housing starts.

EURO RALLIES An improved appetite for risk emerged after a solid bond auction from debt-burdened Spain. The auction results buoyed the euro, which last traded at $1.3380 against the dollar, up 0.7 percent on the day. The euro was up 1.4 percent against the dollar so far in 2013, largely due to growing optimism about the euro zone after surprisingly upbeat comments from European Central Bank President Mario Draghi last Thursday. The next important event for financial markets is Chinese data on Friday. Should the world's second-largest economy show strength, riskier currencies, such as the Australian dollar, should rally. The euro last traded at $1.3380, up 0.7 percent on the day, but below Monday's 11-month high of $1.3403, according to Reuters data. Against the Swiss franc, the euro hit a peak of 1.2490 francs, the highest since May 2011. The euro was last at 1.2480 francs, up 0.9 percent, rising more than 3 percent so far this year.