TOKYO, Sept 17 (Reuters) -The dollar jumped against the yen on Wednesday after the Federal Reserve rescued insurer American International Group easing fears about a financial system crisis.

The Fed said it would lend up to US$85 billion to AIG, once the largest insurer in the world, in a two-year plan aimed at saving the insurer from a 'disorderly failure' that could damage the global economy.

The U.S. action eased worries about the stability of the U.S. financial system and helped high-yielding currencies like the Australian dollar to rebound from multiyear lows against the yen, which was favoured at a time of heightened risk aversion.

"And that may have forced U.S. officials to rescue the insurance company, despite some views that such actions would involve moral hazards," Amikura said.

After the collapse of Lehman Brothers which failed to receive funding assistance from the U.S. government, investors had feared AIG would suffer a similar fate and exacerbate the turmoil in the global markets.

The dollar jumped 0.6 percent to 106.25 yen It climbed as high as 106.72 yen on trading platform EBS, extending Tuesday's sharp rise from a four-month low of 103.54 yen.

The euro rose 0.6 percent to 150.20 yen after shooting up more than 1 percent above 151.50 yen at one stage. The euro's sharp gain versus the yen contributed to its 0.2 percent rise against the U.S. dollar to $1.4160.

AIG's rescue is the latest event in what has already been one of the most tumultuous weeks in the history of finance that has changed the face of the U.S. banking sector. Merrill Lynch agreed on Monday to be bought by Bank of America for US$50 billion.

Yet, the overall market remains fragile as the tightness in U.S. dollar funding persisted in Asia trading on Wednesday, underscoring that the uncertainty about the health of the financial system remained strong, traders said.

"The fact that banks are still distrustful of lending to each other suggests that U.S. companies may be facing more difficulties in getting funds from banks, hurting the broad economy," said Hiroshi Yoshida, a trader at Shinkin Central Bank.

"That's a negative for the dollar," said Yoshida. The Australian and New Zealand dollars were lifted as regional stock markets steadied and major central banks around the world stepped in to shore up confidence in banking system.

The New Zealand dollar gained 1.3 percent to 70.10 yen jumping from a four-year low around 67 yen touched on the previous day.