FOREX-Yen recovers on risk aversion, dollar climbs too

* Yen rallies across the board

* Dollar rises too, risk demand low

* Euro falls 0.6 pct vs dollar, dlr index up 0.5 pct .DXY

(Changes dateline, releads, updates throughout; pvs TOKYO)

By Naomi Tajitsu

LONDON, Dec 9 (Reuters) - The yen rose broadly on Tuesday, even against an otherwise buoyant dollar, recovering from losses suffered the previous day as investors refocused on evidence of global economic weakness.

Demand for risk was low after figures earlier on Tuesday showed the Japanese economy contracted 0.5 percent in July-September, far more than an initial reading of a 0.1 percent decrease [ID:nT356356]. Japanese technology company Sony Corp (6758.T) also announced major layoffs.

The yen rallied nonetheless, as risk aversion prompted investors to continue dumping currencies perceived as being higher risk in favour of the low-yielding Japanese unit.

The risk-averse theme rippled through stock markets, with European shares .FTEU3 falling 0.8 percent in early trade.

"The harsh reality of global weakness is still coming through in markets," said Stephen Koukoulas, strategist at TD Securities in London.

The euro EUR= fell 0.6 percent to $1.2860 by 0900 GMT, pulling back from $1.2968 hit on Monday, according to electronic trading platform EBS, its strongest level since late November.

The dollar traded half a percent higher against a basket of currencies .DXY at 86.120, but it fell 0.6 percent to 92.34 yen JPY=.

The yen rallied across the board, pushing the euro EURJPY=R down 1.5 percent to 118.50 yen. The high-yielding Australian AUDJPY=R and New Zealand NZDJPY=R dollars fell nearly 3 percent against the yen.

Sterling GBPJPY=R dropped 1.5 percent against the yen as investors continued to unwind carry trades, where the yen was used to fund investments in higher-yielding currencies.

Analysts said the market was awaiting a reading of German business sentiment at 1000 GMT. The German ZEW index is forecast to fall to -55.0 in December from -53.5 in November.

JAPAN SLIDE

Share prices slumped after rallying on Monday on a plan announced at the weekend by U.S. President-elect Barack Obama for massive infrastructure spending to boost the economy, and anticipation of a bailout plan for ailing U.S. automakers.

But weak Japanese growth data reinforced fears that the world's second-largest economy is facing its longest contraction ever, forcing Sony, one of the nation's biggest electronics makers, to cut 5 percent of its workforce as part of its restructuring efforts [ID:nT7887].

Investors were also wary of taking on risk as they awaited a U.S. emergency loan package for its top three automakers, while figures late last week showed that the U.S. lost more than half a million jobs in November alone [ID:nN08534770].

Rapidly deteriorating economies have prompted central banks to slash rates aggressively.

The Bank of Canada is expected to cut rates by 50 basis points from 2.25 percent later in the day, according to a Reuters poll [ID:nN05295443], although some in the market are bracing the possibility of an every bigger cut. (Editing by Mike Peacock)