FOREX-Yen gains vs major currencies as optimism fades

* Yen gains on rising risk aversion

* Weak U.S. jobs data sours outlook on U.S., global growth

* July 8-10 G8 meeting eyed for FX diversification debate

* Dollar gives up earlier gains vs euro as stocks edge up

* U.S. services sector shrinks at slower pace (Updates prices, adds detail)

By Steven C. Johnson

NEW YORK, July 6 (Reuters) - The yen gained broadly on Monday as investors nervous about the global economic outlook shunned risk and took shelter in currencies perceived to be safest in times of subpar growth.

The dollar hit a five-week low against the yen as fallout from last week's grim U.S. jobs data unnerved investors who had bet on an improving world economy. The greenback briefly hit a two-week high against the euro but gave up gains as the Dow and S&P 500 staged a late return to positive territory.

When risk aversion rises, investors cut holdings of stocks and higher-yielding currencies and often buy back yen and U.S. dollars that were used to finance the trades.

The market mood, though, remained cautious.

"Belief was building that we would see a straight-line recovery, but a lot of that optimism is coming out of the market in a big way today," said Mark Frey, head trader at Custom House, a currency services firm in Victoria, British Columbia.

"So it's a classic risk-aversion move, with global equities coming off and commodities down, causing commodity currencies to take it on the chin while boosting the dollar and yen."

The dollar was down 0.8 percent at 95.30 yen JPY=EBS after hitting a five-week low of 94.66 yen. The euro hit two-week lows against the dollar and yen. It was last down 0.6 percent at 133.16 yen EURJPY=EBS but wiped out earlier losses to trade up 0.1 percent against the greenback at $1.3973 EUR=.

Sterling fell 0.4 percent to $1.6270 GBP=D4 and 0.9 percent to 155 yen GBPJPY=EBS.

G8 SUMMIT ON HORIZON

Data showing the U.S. service sector shrank at a slower pace in June failed to stop the overall move away from risk, and analysts said traders were coming to terms with seeing recent economic data undershoot expectations. For related news click [ID:nN06223023].