(Updates to U.S. afternoon)

* Treasury told banks it may intervene in yen, source says

* Yen extends gains from prior session

* BOJ leaves rates unchanged at 1%, delivers hawkish signal

* Dollar index set for biggest weekly fall since January

By Saqib Iqbal Ahmed

NEW YORK, July 31 (Reuters) - The dollar fell against the

Japanese yen on Friday, with traders braced for a second round

of intervention after Japanese authorities stepped in to prop up

their currency a day earlier.

The dollar slipped 0.8% to 158.225 yen, a day after sinking

2.4%.

The U.S. Treasury has informed a number of banks that it may

intervene in the yen market on Friday and that they should

"stand ready for future action," a source familiar with the

matter told Reuters.

Japan was also receiving support from the U.S. that "goes beyond

psychological support", Japan's top foreign exchange diplomat

said on Friday.

Eric Theoret, FX strategist at Scotiabank, said it was

unclear if Friday's modest rise in the yen was a result of

actual intervention, or traders reacting to the possibility of

one in the near future.

"In thin liquidity, intervention can have a much greater

impact. Even the mere kind of possibility that this could happen

is definitely something that markets are going to respond to in

a very sensitive way," Theoret said.

Strategists at Goldman Sachs said they see intervention as

an effective tool for authorities to buy some time before

fundamental factors turn more positive.

"It seems likely that authorities would intervene further in

coming days if the yen begins to unwind (Thursday's) move, as

was the case in May of this year," the strategists said in a

note.

The Bank of Japan earlier in the day kept short-term

interest rates steady at 1% in a widely expected move.

The BOJ, which hiked rates to a 31-year high last month,

said for the first time that underlying inflation could exceed

its target, signaling further rate hikes from as soon as

September.

BOJ Governor Kazuo Ueda said many of the board members'

inflation forecasts are fairly high, and they see risks skewed

to the upside.

"We'd characterize that as a hawkish hold, in the sense that

they're very much open to tightening rates, I think, at the next

meeting in September," Scotiabank's Theoret said.

Japan's slow pace of rate hikes has been blamed for pushing the

yen to 40-year lows below 163 per dollar recently. Most analysts

polled by Reuters expect the BOJ to raise rates again to 1.25%

by year-end.

Thursday's moves resulted in spot yen trading volumes surging to

their highest in 10 years on the EBS trading platform and

futures trading volumes hitting their highest on record, the CME

Group said.

In a rare coordinated move, South Korea also conducted

dollar-selling intervention on Thursday to support its currency,

a market source told Reuters.

The won, which rose to a nine-month high on Thursday,

was down about 1% at 1,439.66 against the dollar.

WAVE OF INTEREST-RATE DECISIONS

The BOJ meeting followed the U.S. Federal Reserve's decision on

Wednesday to leave interest rates unchanged, which bruised the

dollar as traders questioned whether the Fed's new chair is

serious about containing inflation.

That has added to the dollar's pain with the greenback down

1.6% for the week, on pace for its biggest weekly fall since

late January, against a basket of peers.

On Friday, it was down 0.26% at 99.807.

In Europe, the euro inched up 0.1% to $1.1535.

Sterling rose 0.2% against the dollar.

The Bank of England also kept its main lending rate steady in a

widely expected decision on Thursday.

In cryptocurrencies, bitcoin slipped 2% to $63,207.