* Dollar rises vs yen on measures to shore confidence

* Yen falls broadly as risk aversion abates

* Paulson urges government: Spend billions on bad debt

* U.S. stocks surge, 3-month U.S. T-bill rate rises (Adds details, updates prices, changes byline)

By Nick Olivari

NEW YORK, Sept 19 (Reuters) - The yen fell on Friday and was set for its worst one-day drop versus the dollar in over five months as steps by U.S. authorities to boost morale in distressed financial markets revived global appetite for risky trades.

U.S. Treasury Secretary Henry Paulson urged the government to spend billions of dollars to deal with toxic mortgage assets choking the financial system, while the Federal Reserve said it would provide loans for purchases of high-quality asset-backed commercial paper from money market funds.

Those developments pressured the yen, which had tapped safe-haven flows from the markets turmoil, sparked by the collapse of Lehman Brothers Holdings this week and forced the government to bail out insurer American International Group.

"The picture has changed dramatically and the biggest loser is the yen as risk appetite returns," said Ronald Simpson Managing, director of global currency analysis at Action Economics in Tampa, Florida.