By Eric Burroughs and Rika Otsuka TOKYO, Oct 10 (Reuters) - The safe-haven yen jumped on Friday, hitting a three-year high against the euro as the panic gripping investors deepened on fears that the global financial system is faltering. Japan's Nikkei share average plunged nearly 12 percent at one stage and was down 23 percent for the week -- about twice what it suffered in the week of the 1987 crash -- after U.S. stocks slid sharply on huge selling of bank and insurance shares. Tokyo stocks were also hit by the bankruptcy filing of insurer Yamato Life, the first Japanese financial institution to fall victim to the credit crisis, and a shock to investors as Japan had up until avoided much of the pain felt in the United States and Europe. "The news of Yamato Life was totally unexpected, sending shivers through the spine of many of us," said Hideki Amikura, deputy general manager of the forex section at Nomura Trust and Banking. "It will prompt fund mangers to further trim risky assets. That is likely to boost the yen." The yen later gave back some gains as the Nikkei trimmed losses to close down 9.6 percent. Other Asian equity markets lost about 3-7 percent. The coordinated interest rate cuts by the Federal Reserve and major central banks this week failed to relieve investor fears that the freeze in credit markets will cause more damage to banks and a sharp economic recession around the world. The market plunge came as leaders from Group of Seven powers huddled in Washington to mull other joint measures to try and stop the panic in markets. Reports said the United States was considering its most dramatic intervention to date -- guaranteeing all bank deposits and debt, a move that would raise more questions about the country's ability to afford such measures. Another worry for investors was that Japanese markets will be closed for a holiday on Monday, while in the United States bond markets will be closed for Columbus Day although stock markets will still be open. That prompted some investors to dump positions to keep any risk off of their books for fear of more victims in the crisis that began in August last year. During Japan's last three-day weekend, investment bank Lehman Brothers went bankrupt. The euro slid to a three-year low of 132.80 yen before trimming losses to 135.51 yen down about 0.9 percent from late U.S. trade. The dollar hit a six-month low of 97.91 yen on trading platform EBS before clawing back to 99.40 yen down 0.5 percent on the day. The Australian dollar, the most battered of major currencies due to its once favoured status in the carry trade, was down almost 4 percent at 65.50 yen and $0.6590 As investors dumped emerging market stocks and currencies in a rush back to the dollar, the dollar hit a 14-month peak against a basket of major currencies. "Investors continue to unwind their carry trade positions in emerging currencies against the dollar and the yen. That is supporting the dollar, as well," said Masafumi Yamamoto, head of FX strategy for Japan at Royal Bank of Scotland. The yen gains tends to gain in times of financial turmoil when investors unwind carry trades using the low-yielding Japanese currency to buy higher-yielding currencies. Since Japan enjoys a capital account surplus from its heavy investment abroad, investors also tend to favour currencies of countries with such a financial position because they are less reliant on foreign funds. (Editing by Edwina Gibbs)

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