FOREX-Dollar leaps after Fed rises discount rate

* Dollar index hits 8-mth high, euro drops to 9-mth low

* Dollar rises to 1-mth high vs yen above 92 yen

* Market sees Fed raising fed funds rates as still far off

By Kaori Kaneko

TOKYO, Feb 19 (Reuters) - The dollar leaped and the euro hit a nine-month low on Friday after the Federal Reserve said it was raising the interest rate it charges banks for emergency loans, stoking expectations that it was moving towards normalisation of monetary policy.

The Fed said the discount rate would be increased to 0.75 percent from 0.50 percent, effective Friday, although it left its benchmark federal funds rate unchanged near zero.

Traders say the timing was unexpected, although Fed Chairman Ben Bernanke had said last week the central bank could soon raise the discount rate but stressed that would not be akin to a tightening in monetary policy.

"The dollar will likely extend gains gradually on market expectations for further moves by the Fed towards normalisation of monetary policy," said Tomohiro Nishida, treasury department manager at Chuo Mitsui Trust and Banking.

"But it will take more time before there is a hike in the fed funds rate as there needs to be improvements in the U.S. economy, such as in the labour market," he said.

The Fed's main policy tool is its target for overnight interbank rates which remains unchanged near zero percent.

The dollar index, a gauge of its performance against six major currencies, rose to its highest level in eight months above 81.250.

The euro fell 0.5 percent to $1.3460 and was trading at its weakest level since mid-May 2009.

Against the Japanese currency, the dollar hit its highest in a month at 92.10 yen on EBS.

Meanwhile, the Australian dollar extended losses despite Reserve Bank of Australia Governor Glenn Stevens hinting that further interest rate rises were likely.

The Aussie fell 0.4 percent to $0.8902. (Editing by Edwina Gibbs)