* Dollar rapidly sheds more than half a yen, as stops triggered

* Dollar index edges away from this week's two-month highs

* Fed Chair Yellen on deck, with planned speech on Friday

By Lisa Twaronite

TOKYO, May 26 (Reuters) - The yen surged on Thursday, taking some of the wind out of the sails of the recently buoyant dollar and prompting investors to cover positions against a backdrop of potential event risks, including a speech by Federal Reserve chief Janet Yellen.

The dollar earlier had stuck close to recent ranges, as investors looked for Yellen to provide clues on Friday as to whether a U.S. rate increase is imminent, and awaited clarity from Japan on whether it would press ahead with planned sales tax hike next year.

Then a sudden spike in the yen in relatively illiquid conditions triggered stop-loss orders and brought the Japanese currency as low as 109.42 per dollar from a session high of 110.235. It was last at 109.69, down 0.4 percent.

"The sudden move shows how jumpy everyone is," said a trader at a foreign bank in Tokyo.

Some market participants mentioned an interview with Masatsugu Asakawa, Japan's vice-minister of finance for international affairs, who told the Financial Times that direct currency intervention will remain in the ministry's toolbox.

Other traders, who did not see any fresh trading catalysts, said they were forced to buy back the Japanese unit as it rapidly shot up against other currency pairs as well as the dollar.

The euro slipped 0.2 percent to 122.70 yen after tumbling as low as 122.25 from a session high of 122.93. The Australian dollar was down 0.3 percent at 79.05 yen after sliding to 78.49 from a high of 79.31.

While Japanese officials have publicly railed against the yen's rapid appreciation to 18-month highs earlier this month, some economic policymakers have told Reuters they are not so worried that the yen will derail efforts to revive exports and the economy.

In addition to talk of currency intervention, investors have been eager for any developments about the timing of Japan's sales tax increase.

Japanese Finance Minister Taro Aso said on Wednesday that he told his G7 counterparts at a finance leaders' meeting last week that Japan will raise the tax as planned. But he did not say whether that meant Japan has officially pledged to the international community that it will go ahead with the increase.

Japan's top government spokesman on Wednesday denied a newspaper report that Prime Minister Shinzo Abe is likely to delay the sales tax hike now scheduled for next year.

"You have conflicting opinions coming out of the same government, and I think that's creating some noise in the market," said Jennifer Vail, head of fixed-income research at U.S. Bank Wealth Management in Portland, Oregon.