* Yen rallies on prospect Japanese pension funds will invest

more domestically

* Markets largely unfazed by renewed Middle East tensions

for now

* U.S. dollar falls; New Zealand dollar gets rates boost

(Updates prices for European session)

By Rae Wee

SINGAPORE, July 10 (Reuters) - The yen bounced on Friday on

news that Japan plans to encourage pension funds to increase

their holdings of domestic financial assets, a move analysts

said could offer more support to the battered currency than

intervention.

Japanese Finance Minister Satsuki Katayama said the

government was pursuing measures that would include the

Government Pension Investment Fund (GPIF), one of the largest

pension funds in the world, to make "substantially greater

investments in Japanese financial assets".

The yen jumped from the weaker side of 162 per dollar

to an intraday peak of 161.285. It was last 0.4% stronger at

161.70 per dollar.

"The pension funds are pretty large in size (and) currently,

50% is allocated to foreign investments in their strategic

allocation, (so) a shift in that would definitely create a lot

more inflows for domestic assets," said Fabien Yip, a market

analyst at IG.

"That's supportive of the currency and at the same time,

also supportive of equities and bonds."

BROAD-BASED YEN RALLY

The rally was broad-based, with the euro and

British pound down around 0.3% against the yen.

Before Friday's news, the yen had been languishing near

40-year lows, keeping traders on guard for potential

intervention by Japanese authorities.

The yen's rise on Friday in turn pushed the dollar lower, as

it fell 0.1% against a basket of currencies to 100.81.

The world's most traded currency was set to end the week little

changed.

The euro rose 0.1% to $1.144, while sterling

was also 0.1% higher at $1.343.

The Australian dollar rose very slightly to $0.695.

WAR CLOUDS SENTIMENT

Investors for now seemed to brush off flaring tensions in

the Middle East, but the implosion of a ceasefire between the

U.S. and Iran has once again cast a cloud over the outlook for

energy prices and global inflation.

"The spectre of war still hangs over sentiment," said

Thierry Wizman, global FX and rates strategist at Macquarie

Group.

"The question confronting traders is whether Iran is willing

to return to large-scale kinetic war with the U.S. and its

allies if necessary to strengthen its claim of control over the

Strait of Hormuz."