(Recasts, updates prices, adds comments; changes byline, dateline, previous LONDON)
* ECB says decision on tapering likely in Oct
* Euro set for biggest 1-day gain vs dollar since Aug. 25
* Dollar falls vs yen amid U.S. fiscal policy outlook
* Dollar index hits lowest level since Jan 2015
NEW YORK, Sept 7 (Reuters) - The euro jetted past $1.20 and was on course for its biggest daily percentage gain against the U.S. dollar in nearly two weeks on Thursday amid European Central Bank indications a decision on tapering stimulus is likely in October, while the dollar slipped against the yen.
The ECB must take into account the weakening of inflation due to the strong euro as it prepares to wind down its unprecedented stimulus program, its chief Mario Draghi said after the ECB kept rates at record lows and confirmed that asset purchases would continue at least until December.
Draghi reiterated, however, that policymakers would decide on tapering this autumn, adding: "Probably the bulk of these decisions will be taken in October."
The dollar index, which measures the greenback against a basket of six major rivals, fell as much as 1 percent to its lowest since January 2015 of 91.405.
"Even though Mr. Draghi tried to sound dovish, in my opinion it sounded like there was a decent level of confidence in economic growth," said Sireen Harajli, FX strategist at Mizuho in New York. "The likelihood to announce tapering in October I think probably drove the euro higher."
The euro rallied as much as 1.2 percent on the day to $1.2059, its highest since Aug. 29, when the currency hit a more than 2-1/2-year high of $1.2069.
The euro has surged more than 14 percent so far this year through Thursday trading, and Draghi cited the strength as a reason for the ECB lowering its inflation forecasts for next year and 2019.
The dollar fell more than 0.6 percent against the safe-haven yen to a session low of 108.50 yen. Analysts said the yen rallied as U.S. and German government bond yields declined on the back of the ECB decision to keep rates at record lows.
The dollar also fell against the yen as traders grew uncomfortable with the outlook for U.S. fiscal policy once a three-month extension to the U.S. debt limit that U.S. President Donald Trump said he agreed to Wednesday expires.
"The risk for the dollar still exists," said Kathy Lien, managing director at BK Asset Management in New York. "The can has been kicked down the road, so the problem hasnt been resolved."
The dollar fell to a fresh more than two-year low against the Canadian dollar of C$1.2139 a day after the Bank of Canada raised interest rates.
(Additional reporting by Saikat Chatterjee in London; Editing by Bernadette Baum)