NEW YORK (Reuters) - The U.S. dollar tumbled, hitting multiweek lows against the euro and against sterling on Monday as the U.S. government’s bailout plan to ease a financial credit crisis reignited worries about the country’s massive budget deficit.

An employee of Korea Exchange Bank counts 100-dollar bills at the bank's headquarters in Seoul September 3, 2008. REUTERS/Jo Yong-Hak

The $700 billion package, which is awaiting congressional approval, would give sweeping powers to the U.S. Treasury to buy mortgage-related bad debts from financial firms, including U.S. subsidiaries of foreign banks.

But analysts say foreign investors will be increasingly reluctant to finance the growing U.S. deficit at the current dollar exchange rate and that funding the gap would require higher interest rates and a weaker currency.

“Nobody knows what form the bailout package will take. We only know vaguely how much it will cost,” said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. The U.S. fiscal position “does not look pretty for this year and next ... Overall, the uncertainty is driving the current flight out of the dollar,” he added.

In late afternoon trading in New York the euro was trading at three-week highs of $1.4837, up 2.5 percent on the day, putting the European currency on track for its biggest one-day gain since its inception in January 1999.

Sterling also benefited from dollar selling, climbing as high as $1.8643. It was last trading at $1.8615, up 1.6 percent on the day.

The Congressional Budget Office has forecast a record U.S. budget shortfall of about $438 billion in the next fiscal year, excluding the cost of the bailout. The rescue package is expected to raise the government’s debt ceiling 6.6 percent.

Against the Swiss franc, the dollar fell more than 3 percent to last trade at 1.0703 francs, according to Reuters Dealing.

Analysts also raised questions about the ultimate form of the government’s proposed $700-billion solution to the credit squeeze and how the illiquid and damaged assets held by banks will be valued and taken onto the government’s books.

The scope of the Treasury’s bailout plan could be extended from covering only mortgage-related assets to other troubled assets, potentially including credit card and loan debt, they said.

UNCERTAINTY WEIGHS ON DOLLAR

“This could significantly increase the initially proposed cost of the program and expose the government’s balance sheet and thus the taxpayer, to even greater uncertainty,” wrote Sacha Tihanyi, associate currency strategist at Scotia Capital in Toronto.

“This uncertainty should continue to weigh on the performance of the dollar going forward, and possibly depress international demand for U.S. assets.”

Some analysts, however, lauded the U.S. government plan, saying they believed that the Treasury had to act to prevent worsening turmoil in financial markets.

The market may be too fixated on the amount of growth of the government’s debt, but may be underappreciating the fact that the government is also taking on assets, says Marc Chandler, head of global strategy at Brown Brothers Harriman in New York.

“We recognize the genuine concerns about the trajectory of U.S. fiscal policy, (but) we think that although the U.S. dollar gets punished in the short term because of the bold and innovative approach by U.S. policy-makers, the U.S. will be rewarded in the medium term for the same reason,” he said.

Adding to the list of significant developments following the Lehman Brothers collapse last week, Goldman Sachs and Morgan Stanley were granted approval on Sunday to become banking holding companies regulated by the U.S. Federal Reserve, enabling them to take deposits and gain easier access to financing as they fight for survival in the current credit turmoil.