TOKYO, August 7, 2008 (AFP) - The yen stayed near a seven-month low against the dollar in Asian trade Thursday amid growing fears that Japan is entering into a recession, dealers said.

The dollar was at 109.41 yen in Tokyo morning trade against 109.76 in New York late Wednesday, when it touched a seven-month high of 109.87 yen.

The euro firmed to 1.5432 dollars from 1.5408 and to 168.82 yen from 169.13.

'Investors are selling off Japanese shares and currencies on signs the country has entered into a recession,' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank.

Data in recent months have signalled weaker conditions. Analysts expect gross domestic product figures due next week to show Asia's largest economy contracted in the second quarter of 2008.

'Markets also feel hopeless about the political situation and whether a group of ageing political leaders will be able to manage this,' Muramatsu said, referring to a new cabinet installed last week by Prime Minister Yasuo Fukuda.

Investors also showed concern after Japan's core machinery orders fell 2.6 percent in June, dropping for the first time in three months, although by less than expected.

The euro was also in focus ahead of a European Central Bank (ECB) meeting later in the day, where interest rates are expected to stay on hold at 4.25 percent, dealers said.

Market players were waiting to see whether the ECB will recognise worsening economic conditions in the eurozone in its post-meeting statement, said Muramatsu.

A sharp fall in German industrial orders Wednesday boosted speculation that the ECB could become keener to cut interest rates in future months despite inflationary pressures.

Germany accounts for around one-third of eurozone output, and the decline in orders sparked fears that the 15-nation eurozone as a whole could be moving toward recession, given that Germany is the bloc's powerhouse.

The Bank of England is also expected to keep interest rates on hold at 5.0 percent Thursday, as the domestic economy falters under the impact of the credit crunch.