* Dollar rallies as Turkish lira slide fans fears of contagion
* Euro drops to lowest since July 2017
* Yen, Swiss franc draw safe-haven bids
* Other EM currencies feel the heat in widespread selloff (Adds details, updates prices)
By Tom Finn
LONDON, Aug 10 (Reuters) - The euro sank to its lowest levels in more than a year on Friday after a report that the European Central Bank (ECB) was growing concerned about the exposure of banks to a dramatic slide in the Turkish lira.
The plummeting lira, caused by a deepening rift with the United States and worries about Turkey’s economy, has sent ripples across markets. Nervous investors jumped into the safe-haven dollar, yen, and Swiss franc and dumped riskier currencies like those in emerging markets.
The euro was hit hard after the Financial Times reported on Friday, citing two sources, that the ECB had concerns about banks in Spain, Italy and France and their exposure to Turkey’s woes.
Traders said that had pulled the euro down against the dollar and other currencies including the Swiss franc.
The Turkish lira’s slump has heightened concern about investor exposure to Turkey and in particular whether overleveraged companies would be able to pay back hard currency loans after years of borrowing in euro and dollars.
“Markets are waiting for a Turkish response to the FX crisis, and hoping for more credible monetary policy as well as diplomatic overtures,” said Societe Generale strategist Kit Juckes.
“The longer the market waits, the more contagious the crisis can be, not just to emerging market assets but to developed market ones. The Swiss franc, yen, and dollar are the only ‘safe’ currencies in the very short term,” he said.
The euro fell 0.6 percent to $1.1432, a 13-month low. Against the yen, the euro slid one percent to a two-month low of 126.79 yen.
The euro is down almost one percent for the week, partly because of investor concerns that Italy is heading for a costly and unsustainable spending spree.
The dollar jumped to a 13-month high against a basket of currencies, climbing more than 0.6 percent to 96.172 before steadying around 96.072.
The Japanese yen and Swiss franc, sought out by investors seeking safety in times of market flux, both rose. The franc gained more than half a percent versus the euro to 1.1394 francs, its strongest since late May.
The flight from risky assets heaped pressure on commodity-linked currencies including the Australian dollar, which fell one percent to $0.7280, an 18-month low, as well as the Canadian and New Zealand dollars.
Emerging market currencies like the Mexican peso, South African rand and Russian rouble also fell as fears of a market contagion out of Turkey spread.
The rouble retreated overnight to its lowest since November 2016, weakening beyond the psychologically important 65-per-dollar threshold.
Russia said on Friday it would consider it an economic war if the United States imposed a ban on banks or a particular currency.
“Risk aversion is taking control again, putting pressure on emerging market currencies while letting the safe haven dollar and the Swiss franc appreciate,” said Antje Praefcke, a currency strategist at Commerzbank in Frankfurt.
Global foreign exchange markets this summer have been dominated by political angst, from U.S. sanctions on Russia and Turkey, to rising tensions in the Middle East and in Europe.
The British pound continued to weaken, falling to a 13-month low versus the dollar as investors fret about the prospect of a “hard” Brexit.
U.S. consumer price inflation data for July due on Friday is expected to show inflation increased 0.2 percent, after rising 0.1 percent in June. (Additional reporting by Tommy Wilkes, Editing by Matthew Mpoke Bigg, William Maclean)