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FOREX-Euro extends gains after $1.20 break; risk trades unwind

* Swiss franc, Japanese yen score big gains vs dollar

* U.S. fiscal problems seen posing fresh challenges

LONDON, Aug 29 (Reuters) - The euro jumped more than half a percent after breaking above a key level on Tuesday while the dollar wilted against its low-yielding rivals as a North Korean missile test sapped investor demand for risky assets.

With markets grasping at the lack of any mention of the euro strength by ECB President Mario Draghi at the Jackson Hole conference in Wyoming last week as a tacit green signal for euro bulls, traders quickly pushed the single currency above the $1.20 line in early trades.

Helping the euro's rise has been a general sell-off in the dollar against its major rivals. A trade-weighted index fell 0.6 percent to its lowest levels since January 2015 with benchmark 10-year U.S. Treasury yields down 6 basis points to 2.09 percent.

"Risk sentiment has taken a beating on the North Korea jitters and weak equity markets with the only exception being the euro, as the uptrend momentum seems to be behind the single currency," said Stephen Gallo, European Head of FX Strategy at BMO Financial Group in London.

North Korea fired a missile early on Tuesday that flew over Japan and landed in Pacific waters off the northern Japanese region of Hokkaido in a sharp escalation of tensions on the Korean peninsula.

Stock markets across the region were a sea of red with U.S. stock index futures pointing down 0.8 percent while the Swiss franc and the Japanese yen falling more than 1 percent and 0.8 percent respectively.

The euro extended gains to be up 0.6 percent on the day to $1.2052 against the dollar after breaking above the $1.20 line in early trades. It has gained nearly 2 percent so far this month and is up more than 14 percent this year.

Financial markets are fretting about the fiscal situation in Washington - deadlines loom in late September and early October on the U.S. budget and the federal debt ceiling.

Republican President Donald Trump stoked anxieties by threatening on Aug. 22 to shut down the government if Congress does not fund his proposed U.S.-Mexico border wall.

"The market is still digesting Draghi's comments from Jackson Hole and the U.S. outlook is looking difficult with the concerns around the budget and a looming shutdown," said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

Against sterling, the euro skipped to its highest level since October 2016 at 93.07 pence.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Reporting by Saikat Chatterjee; editing by Mark Heinrich)