FOREX-Dollar tumbles on Yellen's dovish comments

* Yellen stays in character, but comments hurt dollar

* ECB may start asset purchases or cut rates further

* Sterling spikes after Bank of England report, UK jobs data

* Yen near 2-month low vs dollar on higher U.S. bond yields

By Gertrude Chavez-Dreyfuss

NEW YORK, Nov 13 (Reuters) - The dollar dropped in late trading on Wednesday after Federal Reserve Vice Chair Janet Yellen said the U.S. economy was performing "far short" of potential, suggesting the central bank is in no rush to withdraw its stimulus.

The remarks were released ahead of the Fed chair nominee's appearance before the Senate Banking Committee on Thursday for a confirmation hearing. Yellen, in her prepared testimony, highlighted the U.S. economy's weaknesses, citing the high jobless rate and low inflation.

Most investors expected Yellen would be dovish and continue the policies of current Fed Chairman Ben Bernanke.

"As expected, Yellen did not go out of character," said Kathy Lien, managing director at BK Asset Management in New York. "Expectations for a Fed tapering in December have become overextended and as a result, we will see a weaker dollar over the next 24 hours."

Following a blockbuster U.S. jobs report for October, market participants had started to price in a Fed tapering at the December meeting.

Yellen's stance was consistent with comments from other Fed officials this week.

In comments that pressured the dollar, Dennis Lockhart, the Atlanta Fed president, who is seen as a centrist in policy terms, and Narayana Kocherlakota, the Minneapolis Fed president, both suggested on Tuesday that the U.S. economy still warrants aggressive monetary policy action.

The dollar fell to session lows against the euro and yen after Yellen's statement. The euro rose to the day's highs at $1.3495 and was last $1.3487, up 0.4 percent.

Against the yen, the greenback fell to session lows of 99.08 yen. It last changed hands at 99.23 yen, down 0.4 percent.

The euro was resilient, rising even though European Central Bank Executive Board member Peter Praet said the ECB could start buying assets or cut its deposit rate into negative territory to trigger a rise in inflation to the central bank's target.

The euro briefly inched lower after the ECB's Praet was quoted as saying in The Wall Street Journal that "the balance-sheet capacity of the central bank can also be used (to fulfil the inflation mandate)," including outright asset purchases.

Praet also said the ECB still had room to move on interest rates even after cutting the main rate to a record low of 0.25 percent last week and keeping the deposit rate at zero.

"I am really surprised about the euro's strength despite Praet's comments and this just goes to show you going into the holiday season investors are not willing to push the euro lower," said Vassili Serebriakov, currency strategist at BNP (Paris: FR0000131104 - news) Paribas in New York.

In late trading, the dollar index was down 0.5 percent at 80.793.

STERLING RALLIES

Sterling rallied after the Bank of England said there was a chance British unemployment could fall to 7 percent in the fourth quarter of 2014. Data published earlier on Wednesday showed Britain's unemployment rate fell to 7.6 percent in the three months to September.

That kept alive speculation the UK central bank might raise interest rates far earlier than it has flagged so far, highlighting a divergence between Britain's monetary policy path and that of both the European Central Bank and Bank of Japan.

"The tone struck in the quarterly inflation report was that of a more optimistic BoE (Shenzhen: 000725.SZ - news) , with Governor (Mark) Carney even suggesting that it's hard to ignore that the 'glass is half full,'" said Chris Vecchio, currency analyst at DailyFX.com in New York.

Sterling was last up 0.8 percent at $1.6025 after earlier rising to $1.6046, rebounding from Tuesday's two-month low of $1.5852. It gained after the better-than-expected UK jobs report and a raised growth forecast from the central bank.

Carney, speaking on Channel 4 television on Wednesday, said the UK central bank "absolutely" is prepared to raise rates before 2015 election if needed.