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FOREX-U.S. dollar flattened by rallying euro; kiwi flies

* Dollar index flounders at 8-month lows as euro rallies

* ECB, Italian politics support common currency

* Kiwi a standout performer thanks to hawkish-sounding RBNZ

By Ian Chua

SYDNEY, Oct 3 (Reuters) - The dollar languished at eight-month lows early in Asia on Thursday as the U.S. government shutdown dragged on, while positive developments in Italian politics and a watchful but patient European Central Bank helped lift the euro.

The common currency rose as high as $1.3608, a level not seen since early February, after Italian Prime Minister Enrico Letta won a confidence vote in parliament as Silvio Berlusconi backtracked on threats to bring down the government.

Adding to the euro's momentum, the European Central Bank simply reiterated it was ready to use any policy option to temper market interest rates, but did not flag immediate action.

Indeed, JPMorgan analysts said there was nothing in ECB President Mario Draghi's comments that suggested the bank was "about to launch a major easing offensive."

"The ECB is in wait-and-see mode and is tolerant of a recovery that is modest and of inflation that is far below target," they wrote in a client note.

They added that declines in money market interest rates since the last ECB meeting have in part lessened the momentum for new measures.

The euro last stood at $1.3581, with the latest push bringing the currency near its 2013 peak of $1.3711 set on Feb. 1. That, in turn, drove the dollar index to its lowest in eight months and towards its 2013 trough.

Against the yen, the dollar hovered near a five-week low around 97.14. The euro lost only a bit of ground to trade at 132.37 yen after recovering from a low around 131.39.

Traders said the dollar could make a comeback against safe-haven currencies such as the yen if a deadlock that has shut down wide swaths of the U.S. federal government was broken.

President Barack Obama met with Republican and Democratic leaders in Congress on Wednesday but a solution seemed unlikely as both sides dug in for what could be a long stalemate.

A notable mover was the New Zealand dollar, which rallied broadly after the Reserve Bank of New Zealand said larger increases in interest rates would be needed if new limits on mortgage lending fail to cool the country's housing market.

The kiwi jumped to a high around $0.8340, pulling well away from a two-week trough of $0.8194 plumbed on Wednesday. It last traded at $0.8309.

Asia again has a dearth of economic news on offer for Thursday, apart from a survey on China's services activity.

The latest reading on the Chinese manufacturing sector was a bit of a letdown, so any further disappointment will only add to worries that a nascent recovery in the world's second-biggest economy may be foundering.