FOREX-Yen gains sharply as U.S. bailout talks stall

* Yen gains, dollar falls as US bailout deal stalls

* Major central banks launch cash injections

* WaMu closure, largest U.S. bank failure, hurts dollar

* U.S. Michigan consumer confidence, final Q2 GDP data eyed (Updates prices, adds quotes, changes byline, previous TOKYO)

By Jessica Mortimer

LONDON, Sept 26 (Reuters) - The yen jumped by over one percent against the dollar on Friday as risk aversion grew after negotiations on the $700 billion U.S. financial crisis bailout stalled and following the biggest ever U.S. bank failure.

Investors rushed to buy the safe haven Japanese currency as they tried to reduce exposure to risk. Asian stock markets fell and European shares were trading around 1.5 percent lower.

As negotiations on the bailout deal ended in acrimony on Thursday when a rival Republican plan emerged, authorities shut down Washington Mutual, the largest U.S. savings and loan bank, and sold its assets. (For details please double click on [ID:nSP375703])

"The market is increasingly nervous and the yen has been picking up," said Rob Minikin, currency analyst at Standard Chartered. "As it became clear that the bailout plan would not be agreed ... U.S. equities saw a big downswing and that has been key to the yen revival."

Central banks scrambled on Friday to inject desperately-needed cash into jammed money markets as the rescue plan ran into trouble. [ID:nSP346519].

At 0813 GMT, the dollar fell 1.1 percent against the yen to 105.26 yen, while the euro lost 1.3 percent to 153.49 yen EURJPY. The euro was down a quarter of a percent against the dollar at $1.4585.

Meanwhile, the high-yielding Australian dollar fell over 1 percent against the U.S. dollar and over 1.5 percent against the yen as investors rushed out of risky assets.

MARKET STILL EXPECTS DEAL WILL BE REACHED

Market participants still expect a deal to be agreed in some form, however, and they are unwilling to adopt big positions as a result, analysts said.

"The overwhelming sense is that some deal will be struck," Standard Chartered's Minikin said. "But the general feeling is that because it is ending up as an uneasy compromise. It is likely to be less satisfactory than the clearcut Paulson solution."

News of the Washington Mutual failure further damaged sentiment, although the third-largest U.S. bank JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) said it bought the deposits of the bank, which had seen its stock price virtually wiped out because of massive amounts of bad mortgages. [ID:nLQ348949].

Coming up, the market will be looking to the release of final U.S. second quarter GDP data. The latest University of Michigan consumer confidence survey will be closely eyed for an indication of how the recent financial market turbulence is feeding through into sentiment.

"The Michigan consumer sentiment reading later in the day could present some short term trading opportunities," Gary Thomson, head of sales trading at CMC Markets said in a note to clients.

"Confidence has been improving of late but the landscape has changed dramatically this month. Whether this will be picked up in the September survey remains to be seen but anything that's pointing even marginally lower this time around stands to be amplified significantly in the October reading". (Reporting by Jessica Mortimer, Editing by David Stamp)