* Kiwi set for biggest daily fall since May

* U.S. dollar up; riskier currencies lose out

* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E (Updates prices, adds comment and chart)

By Elizabeth Howcroft

LONDON, Aug 17 (Reuters) - The New Zealand dollar tumbled to its lowest in nearly three weeks on Tuesday after the country identified its first COVID-19 case since February, prompting the government to announce new short-term lockdown measures.

The currency fell sharply in early Asian trading hours, extending losses around 0630 GMT when Prime Minister Jacinda Arden said that Auckland - where the case was reported - would go into lockdown for seven days, while New Zealand as a whole will have the toughest level of lockdown for three days.

At 1126 GMT, the New Zealand dollar was down 1.4% at $0.6927, its lowest in 20 days and on track for its biggest daily fall since May.

New Zealand has followed a go-hard-and-early strategy that has helped it virtually eliminate COVID-19 domestically, allowing people to live without restrictions although its international borders remain largely closed.

The news came just a day before the country's central bank, the Reserve Bank of New Zealand (RBNZ), is widely expected to become the first among developed countries to raise interest rates since the pandemic as its economy booms.

The market for interest rate swaps suggested the probability of a quarter-point rate hike fell to 85%, from more than 100% . Analysts at Australia's Westpac and New Zealand's ASB Bank said that the RBNZ was likely to keep the rate steady.

But Eddie Cheng, head of international multi asset portfolio management at Wells Fargo Asset Management, said that the currency remained attractive over the short to medium term due to its positive carry - a term for when a currency has a higher interest rate.

"At this moment we do think that there could still be a hike," he said.

MUFG said in a client note that the RBNZ may well do a rate hike on Wednesday "but the guidance accompanying the action is now likely to be a bit more balanced with the RBNZ emphasising flexibility based on risks like any pick-up in COVID cases."

Elsewhere, the tone in currency markets was generally risk-averse, as European stock indexes were in the red. Asian shares were rattled by concerns about China's plans to regulate the internet sector, the latest move in a crackdown on the country's powerful tech companies.

The U.S. dollar was up 0.1% at 92.701, after gaining in the previous session. The euro was steady against the dollar at $1.1771.

The Australian dollar fell to a nine-month low after central bank meeting minutes were seen as dovish and by 1138 GMT was down 0.6% on the day at $0.7293.

The minutes showed the Reserve Bank of Australia (RBA), which surprised markets by sticking to its plan to start tapering bond buying, would be prepared to take policy action, should coronavirus lockdowns across the country threaten a deeper economic setback.

The safe-haven Japanese yen and the Swiss franc were close to the previous session’s 10-day high versus the dollar .

The two currencies were boosted in recent days by weak economic data from the United States and China which stoked worries that the spread of the Delta variant could slow the economic recovery from COVID-19.

The number of employees on British company payrolls moved closer to its pre-pandemic level last month and, at 4.7%, the unemployment rate was slightly below the 4.8% forecast by economists polled by Reuters. But the pound was still down by about 0.3% on the day, as the effect of the stronger dollar dominated over the domestic news.

(Reporting by Elizabeth Howcroft; Editing by Emelia Sithole-Matarise and Chizu Nomiyama)