FOREX-US dollar sinks on financial sector worries, yen up

* Concerns over Fannie, Freddie, Lehman weigh on dollar

* Dollar index on track for worst loss in five months

* Risk aversion fuels broad gains in yen (Updates prices, adds quotes, U.S. data)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 21 (Reuters) - The dollar tumbled on Thursday, pressured by persistent worries over the U.S. financial sector, which also sparked a broad flight from risky trades and pushed the Japanese yen sharply higher.

The latest slide puts the U.S. dollar index, a gauge of its value against a basket of six major currencies, on track for its worst one-day fall in five months. Against the yen, the dollar was on pace for its sharpest daily loss since July.

Thursday's surge in oil prices CLc1 further worsened sentiment toward the dollar, which was already suffering from concerns over the viability of U.S. mortgage agencies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), and investment bank Lehman Brothers LEH.N.

"It looks like in the last couple of days, the foreign exchange market is finally waking up to (Fannie and Freddie) and that should pose a problem for the dollar," said Richard Franulovich, a senior currency strategist, at Westpac Institutional Bank in New York.

"It's a problem for the dollar because it spotlights the financial system and obviously there's no chance that the Federal Reserve will hike rates in this environment."

In midday New York trading the dollar was down 1.3 percent at 108.35 yen <JPY=. The yen usually gets a bid in times of heightened financial stress because investors sell riskier and higher-yielding assets purchased with the Japanese currency's low interest rates.

The decline against the yen was the main driver of a 1 percent fall in the dollar index on the ICE Futures Exchange to 76.114 .DXY.

Lehman Brothers came to the fore once again after the Financial Times reported that China's CITIC Securities and state-owned Korea Development Bank walked away from talks over a 50 percent stake in the investment bank because the price was too high. A Lehman spokeswoman declined to comment on the report.

Analysts had also said this week that Lehman could soon announce write-downs of up to $4 billion.

NOT DENTING RECOVERY STORY

Still, analysts remained optimistic about the dollar's prospects, saying the latest dip was just a pullback in what was generally a dollar bull market.

"Given the scope of the dollar's moves over the past two weeks, this correction is not too surprising and is actually quite modest. I don't think this puts into question the dollar's recovery," said Vassili Serebriakov, a currency strategist, at Wells Fargo in New York.  Continued...