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* Sharp falls in equities prompt flight to safety
* Swiss franc eyes potential test of parity with euro
* Dollar supported versus commodity currencies
* Markets focus on FOMC announcement in U.S. session
By Neal Armstrong
LONDON, Aug 9 (Reuters) - The Swiss franc surged to all-time highs against the euro and the dollar in volatile trade on Tuesday as fears of a global recession drove further declines in already under-fire stock markets and kept safe-haven currencies in high demand.
European stocks were down 5 percent at one stage in morning trade as investors continued to dump risky assets across the board following Wall Street's biggest selloff since December 2008, which prompted a massive flight to safety.
Markets have become deeply risk-averse in recent days after Friday's S&P downgrade of U.S. sovereign debt and persistent worries over the euro zone spooked investors and fuelled concerns a global recession could be around the corner.
The euro tumbled through a low of 1.0605 francs hit in Asian trade, dropping within seconds to its lowest on record at 1.0475, according to EBS data. It was last at 1.0580 in volatile trade, down around 1.2 percent for the day.
Analysts said the franc looked likely to reach parity with the euro, despite the Swiss National Bank's (SNB) recent easing of monetary policy and warnings over the franc's strength, which have triggered concerns over currency intervention.
"Parity looks pretty likely for euro/Swiss as long as there is heightened risk aversion," said Tom Levinson, currency strategist at ING.
"The SNB has been threatening but they had a terrible time with intervention last time and the market is taking them on," he added.
The SNB is likely to be reluctant to intervene in currency markets after attempts to weaken the franc when the euro fell below 1.50 in the wake of the Lehman crisis left the central bank sitting with heavy losses.
The franc also rose sharply to an all-time high versus the dollar on EBS of 0.7359 francs before easing a touch to 0.7417.
Options markets showed implied volatility in the euro/Swiss -- a measure of the market's expectations of future movements in the currency pair -- at record levels of over 20 percent in the one-month , after surpassing levels seen at the peak of the Lehman crisis on Monday.
Analysts expected more liquid currencies to stay in favour in a predominantly risk-off environment.
"Liquidity matters in the current environment so the Swiss franc, the yen, the dollar and to some extent the euro will remain well supported. They are large and liquid and don't have the stretched positioning associated with carry currencies such as the Aussie, kiwi and the Nordics," said Raghav Subbarao, currency strategist at Barclays Capital.
Commodity currencies stayed under pressure following heavy falls in the Asian session.
At one point the Australian dollar fell below parity against the U.S. dollar, sliding to $0.9927 , its lowest in about five months, but later recovered to $1.0157.
The Aussie has lost about 10 cents from a 29-year peak of $1.1081 set just two weeks ago.
The dollar drifted to 76.991 , below levels where Japanese authorities intervened heavily on Aug. 4. and not far off the record low of 76.25 yen reached in mid-March. It was last down 0.8 percent at 77.14 yen.
The dollar briefly spiked against the yen in Asia, fuelling speculation that Tokyo authorities had stepped into the market to follow up on last week's massive yen selling intervention, but there were no sightings of official action on Tuesday.
Japanese Finance Minister Yoshihiko Noda said on Tuesday he was watching markets with a sense of urgency after share prices tumbled.
The euro gained some support after European Central Bank President Jean-Claude Trichet said on Tuesday the ECB was actively buying government bonds.
It was last up around 0.7 percent for the day at $1.4282.
The market's next focus is squarely on Federal Reserve policymakers due to meet on Tuesday.
There has been talk that the Federal Reserve Open Market Committee (FOMC) will discuss options for more measures to help the economy, but the consensus view is that it will refrain from any fresh stimulus after having completed a $600 billion bond-buying programme, dubbed QE2, in June.
"The base case from the FOMC today is a suitably downbeat commentary on the state of the economy. At this juncture, floating the idea of QE3 seems unlikely and in any case an inappropriate tool," said ING's Levinson. (Editing by Susan Fenton)