By Toni Vorobyova

LONDON, Feb 6 (Reuters) - The yen gained against the dollar and euro on Wednesday as worries about the health of the global economy and a sharp sell off in Asian equity markets made investors less willing to take on risk.

In such an environment, they tend to buy back the Japanese currency, having previously borrowed it as a source of cheap funding for relatively risky carry trade bets in higher-yielding assets.

Worries about the global economic outlook were stoked on Tuesday by a much bigger than expected plunge in the U.S. Institute for Supply Management’s non-manufacturing index, which posted its biggest monthly decline on record.

There were also signs that the slowdown will not just be limited to the United States, as euro zone retail sales fell on the month in December despite Christmas shopping, while growth in the bloc’s service sector slowed to almost a standstill in January.

“This is the kind of session that’s dominated by risk aversion, with concerns about global economic risk — not only in the U.S. but also now in Europe — and equity markets suffering,” said Carole Laulhere, currency strategist at Societe Generale in Paris.

By 1118 GMT, the dollar was down a third of a percent at 106.46 yen <JPY=>, bringing its losses for the year so far to over 4 percent.

The euro fell 0.4 percent to 155.70 yen <EURJPY=>. It also eased against the dollar, to $1.4621 <EUR=> — more than three cents below last November’s record highs.

ECB CUTS TO COME?

The European Central Bank is widely seen leaving rates at 4 percent on Thursday, leaving the focus on president Jean-Claude Trichet’s post-decision news conference.

“Any suggestion that the next move (in rates) will be lower — and possibly as soon as the second quarter of 2008 — could initiate further selling of the euro,” CMC Markets said in a research note.

Futures markets expect the ECB to cut interest rates by 50 basis points by the third quarter FEIU8 and are split on a further quarter-percentage point easing by the end of the year.

Adding to downward pressure on the euro were worries about European banks — whose earnings season kicks off this week — reporting more losses related to troubles in the U.S. subprime mortgage market and the subsequent credit crunch.

Currency market activity slowed in late Asian trading as financial markets in China, Taiwan and South Korea were closed for the Lunar New Year holiday.

Wednesday’s calendar features speeches from several Federal Reserve policymakers, as well as fourth quarter data on U.S. productivity and unit labour costs.