The yen hit a three-month high against the euro in early trade on Monday as the sell-off in global equity and credit markets prompted investors to cut back on risky positions such as carry trades.

But the yen gave up some gains as overall losses in Asian equities turned out to be limited, and as Japanese investors and other market players seized on the rise as an opportunity to sell the low-yielding yen for higher-yielding currencies.

A lot of people are wanting to sell on any rallies, said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo.

The yen was also dented after a crushing defeat for Japanese Prime Minister Shinzo Abe's ruling camp in upper house elections on Sunday that threatened policy gridlock, with the conservative leader vowing to stay in his post.

Analysts said the fallout from the Japanese election was negative for the yen but would take a back seat to worries about a further tumble in stocks and corporate bonds following the sell-off driven by U.S. markets last week.

The Nikkei share average fell 0.67 percent, having trimmed some losses after falling more than 1 percent and hitting a four-month low earlier in the session.

Abe said he won't step down, so the impact on monetary policy is limited, said Masafumi Yamamoto, a currency economist at Nikko Citigroup. The yen is still very sensitive to the risk reduction story, and stock markets will be key this week.

The dollar fell 0.1 percent to 118.46 yen after sliding in early trade close to the 3-1/2-month low of 118.02 yen struck last week on electronic trading platform EBS.

The euro slipped 0.1 percent to 161.49 yen having recovered nearly a full yen from a three-month low of 160.64 yen hit in early trade on EBS.

The single European currency was little changed near $1.3629

AUSSIE AND KIWI SLIDE

The yen has jumped as market players reverse positions using the low-yielding Japanese currency as a cheap source of funds to buy higher-yielding currencies like the Australian and New Zealand dollars in the carry trade.

In the five trading days through Monday, the New Zealand dollar has shed 7.5 percent against the yen, the euro 3.4 percent and the dollar 2.1 percent, evoking the shake-out in carry trades during the global stock plunge in late February and early March.

Unless equities markets regain some calm, I don't think you'll see an atmosphere where people will be ready to take on risk, said Junji Kojima, senior deputy manager for Sompo Japan Insurance Inc's global securities investment department.

In the near term, the yen seems likely to be bought as market players keep an eye on equities, Kojima said.

Japanese data showing industrial production expanded a robust 1.2 percent in June helped reinforce expectations for the Bank of Japan to raise rates next month.

The flare-up of volatility in markets has prompted investors to cut the chance of a rate increase to about 50 percent from above 90 percent earlier in July. The BOJ has long been expected to raise rates in August to 0.75 percent from 0.5 percent.

The wave of risk reduction also prompted investors to take profits in the Australian and New Zealand dollars, which have surged this year from central bank credit tightening or expectations of more tightening to come.

The Aussie edged down to $0.8494 having trimmed some losses after hitting a one-month low of $0.8470 in early trade. The kiwi fell 0.5 percent to $0.7613 but also recovered from a six-week low of $0.7561.

The Aussie hit a two-month low against the yen near 100.00 yen and has shed more than 7 percent after striking a 16-year high on July 20.

(Additional reporting by Masayuki Kitano)

Japan Nikkei 225