The dollar fell on Tuesday on a media report, later denied, that Gulf Arab states were in talks to abandon the dollar in oil trade, while the Australian dollar rose after the Reserve Bank raised interest rates.

The U.S. dollar had already been under pressure on expectations the U.S. Federal Reserve would not rush to raise its interest rates and on the growing view that the greenback has become a funding currency for carry trades.

The Reserve Bank of Australia raised its key cash rate by 25 basis points to 3.25 percent, becoming the first Group of 20 central bank to hike as the global financial crisis eases.

Analysts said other countries could begin to consider raising rates as the crisis subsided.

While the Fed and the European Central Bank may be in no hurry to raise rates, "other central banks appear more willing to reverse some of the massive monetary accommodation that has been put in place over the past year," said Stuart Bennett, currency strategist at Calyon.

The Australian dollar rallied to a 14-month high AUD=D4 of $0.8876 after the RBA's decision. The New Zealand dollar also hit a 14-month high, rising to $0.7357 NZD=D4.

A rise in equity and commodity prices on the back of strong U.S. data the previous day also drove investors from the U.S. dollar and into perceived riskier assets.

By 0917 GMT, the dollar index, which tracks the performance of the greenback versus a basket of six major currencies, was down 0.4 percent at 76.302 .DXY, inching back towards a 13-month low of 75.827 hit in late September.

The euro rose 0.6 percent on the day to $1.4733 EUR= while the dollar fell 0.5 percent against the yen to 88.96 yen JPY=, nearing an eight-month low of 88.23 yen hit last week.

Traders said options worth 200 million euros with a strike price of $1.4750 were due to expire later in the day.

Options worth almost $1 billion in dollar/yen with strike prices in a range of 88 to 91 yen may limit the dollar's upside.

AUSSIE SURGES

Traders said the Australian dollar would be on a uptrend on expectations of further monetary tightening.

But others said more rate increases were already factored into the market, and the Aussie's upside would probably be limited at around $0.90.

Earlier, the U.S. dollar fell after Britain's Independent newspaper reported Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the dollar with a basket of currencies in oil trading over nine years.

But Saudi Arabia's central bank chief said the story was "absolutely incorrect" while authorities from Kuwait and United Arab Emirates said they did not see any need for a new currency for oil trade.

Russia had not discussed changing the dollar's role in the global trade of oil, deputy Russian finance minister Dmitry Pankin said. Japanese finance minister Hirohisa Fujii also said he was unaware of the report.

"A story of this nature smells of conspiracy theory and therefore has to be regarded with some suspicion," Commerzbank analysts said in a note. "It does however match the current zeitgeist very well: It is currently very much en vogue to demand and predict a new 'world financial order'."