UPDATE 2-Japan's Fujii says shouldn't devalue currencies

* Says never favoured either weak yen or strong yen

* Important to stabilise currency value based on economy

* Vows to shift from reliance on exports to domestic demand (Adds quotes)

OSAKA, Japan, Oct 15 - Japanese Finance Minister Hirohisa Fujii reiterated on Thursday that countries must not compete in devaluing their currency to help their exports while shrugging off speculation that he may favour a stronger yen.

"Currency dumping in 1930 ruined the world economy," Fujii said in a meeting with business leaders in Osaka, western Japan.

He also repeated his view that Japan should not rely too much on exports for economic growth and that the new Democratic Party-led government is striving to turn the economy into one led by domestic demand.

The dollar briefly dipped against the yen after Fujii's comments, but the impact was limited as the greenback remained above its intraday low of 89.27 yen.

Fujii also said he had never favoured a weak yen or a strong yen for Japan's economy.

"That's something the business community should think about," Fujii told a news conference after meeting with business leaders.

"Our political task is to stabilise the value of the currency. The basis for stability is the need for the currency's value to match the economy's strength. This must be ensured by politics."

Since becoming finance minister last month, Fujii has caused turbulence in currency markets by repeatedly saying a strong yen could help expand Japan's domestic demand and that the country should not weaken the yen to protect exporters' earnings.

Fujii has since tried to tone down his rhetoric on currencies by saying he never explicitly called for a stronger currency and that the Finance Ministry could intervene if foreign exchange moves got out of hand.

"My remarks have caused a lot of misunderstanding," Fujii told reporters.

"What I said at the G7 and G20 was that competitive devaluations were not good. I never said the yen should be this or that."

The Democratic Party has been critical of the policies of the previous government led by the Liberal Democratic Party (LDP), saying it catered too much to the corporate sector at the expense of ordinary people.

Japan's authorities under the LDP intervened heavily earlier in the decade to stop a rising yen from harming exports. But the authorities have not intervened since March 2004, the end of a 15-month long spree in which they sold 35 trillion yen ($391.3 billion) to shield a struggling economy. ($1=89.43 Yen)