The yen gained broadly in volatile trading on Tuesday as persistent jitters about global credit conditions prodded investors to sell more risky assets funded by borrowing at low rates in the Japanese currency.

Markets remain concerned about the health of global credit markets even after the Federal Reserve on Friday cut its discount rate to soothe investor nerves.

The yen is generally biased to be stronger on the back of continued carry unwinding and volatility remaining high, said Camilla Sutton, currency strategist at Scotia Capital in Toronto.

Rumors spread in financial markets early in the session that the Fed could lower interest rates on Tuesday. A report from Market News, citing Fed sources, said the U.S. central bank is ready to take more action, including cutting benchmark rates.

U.S. Treasury Secretary Henry Paulson also sought to calm financial markets, saying in a CNBC Television interview that U.S. and global economies remain strong and liquidity will return to normal when investors reassess risk. But he warned that liquidity problems will take time play out.

That did little to ease overall credit concerns, with U.S. stocks little changed in choppy trading and Treasuries prices higher as investors sought safe haven.

Late morning in New York, the dollar was down 0.5 percent against the yen at 114.40 yen. The euro fell 0.3 percent against the Japanese currency, to 154.30.

Against the dollar, the euro was up slightly at $1.3491.

Currencies traded within relatively tight ranges, although traders said there was good two-way trading overnight.

Overall, stocks are still dictating movements in the currency market and analysts said both the dollar and euro remain vulnerable to further losses against the yen should equities become volatile again.

Fed Chairman Ben Bernanke, Paulson and U.S. Senate Banking Committee Chairman Chris Dodd met on Tuesday to discuss conditions in financial markets, and Dodd told a news briefing after the meeting that he stressed to both Bernanke and Paulson the need to keep markets liquid.

After the collapse in yields in the US-T-bill market yesterday, financial markets are itching for a Fed Funds rate cut to catch it up with where short-term interest rates already exist, said Andy Busch, global FX strategist at BMO Capital Markets in Chicago.

Yields on U.S. three-month bills were at 3.30 percent on Tuesday following Monday's plunge, the biggest one-day drop in bill rates since the stock market crash of 1987.

In other trading, the high-yielding New Zealand dollar posted steep losses against the yen to trade at 79.53 yen, down nearly 1.0 percent from late on Monday. The New Zealand currency fell 0.5 percent against the greenback to US$0.6953.

The New Zealand dollar is often seen as a good proxy for gauging investor appetite for the carry trade, in which low-yielding currencies are borrowed for investing in higher-returning assets.

Last Friday the Fed cut the discount rate it charges on direct loans to banks by half a percentage point, to 5.75 percent, saying credit market tightening could slow U.S. growth. That fueled expectations the Fed could lower the fed funds rate from the current 5.25 percent, given the threat to the economy from evaporating credit.

Goldman Sachs economist Ed McKelvey said in a research note that Fed officials may feel compelled to cut the funds rate target well before the September 18 FOMC meeting, possibly within days, and if so by 50 basis points.

Rate futures have fully priced in a half percentage point rate cut at or before the meeting of the Fed's policy-setting Open Market Committee.

(Additional reporting by Jamie McGeever in London)