* Dollar gains, Aussie tumbles as China raises rates
* U.S. Treasury's Geithner comments support dollar
* China move sparks risk aversion; dollar still vulnerable (Updates prices, adds comment, detail)
By Steven C. Johnson
NEW YORK, Oct 19 (Reuters) - A surprise interest rate increase from China on Tuesday rattled investors who cut risk exposure by selling the euro and commodity-sensitive Australian dollar and taking refuge in the U.S. currency.
Investors feared a quarter percentage point rise in China's one-year lending rate could dampen Chinese and global growth and slow the country's voracious demand for commodities, many of which come from Australia.
"China's rate increase instantaneously pushed people to take risk off the table," said Boris Schlossberg, director of research at GFT Forex. "(China) is trying to clamp down on growth and that's going to reflect badly on Australia, on Germany, on much of the world economy as it readjusts to the idea that Chinese growth may not be as torrid as expected."
The Australian dollar, which last week rose above parity with its U.S. counterpart for the first time since 1983, was hit hardest, slipping 1.5 percent to $0.9752.
The euro and sterling also fell sharply, with the former down 1 percent at $1.3811, off a $1.4003 session peak. Support around $1.3770 has held so far, though traders said a break of that level could target $1.37.
"The dollar is finding some support here after China's rate hike triggered a bout of risk aversion, but the euro above $1.40 was overbought, so the rebound is no real surprise," said John Doyle, strategist at Tempus Consulting in Washington.
The dollar rose 0.5 percent to 81.65 yen, its best daily gain since Japan intervened to weaken the yen on Sept. 15. It hit a 15-year low beneath 81 yen last week. The Australian dollar/yen exchange rate, an important barometer of risk sentiment, fell 1 percent to 79.52 yen.
The U.S. currency also rose 1.3 percent to 1.0305 Canadian dollars after the Bank of Canada left interest rates at 1 percent and cut is growth forecast.
DOLLAR STILL VULNERABLE TO SELLING
Hobbled by zero interest rates and expectations of more Federal Reserve easing to come, the dollar has been under pressure since September. Analysts, however, say the expectations of Federal Reserve easing have been priced in, providing an opportunity for investors to take profits.
The dollar's rebound began after the euro rose above $1.41 last week, an 8-1/2-month high. It continued on Monday after Treasury Secretary Timothy Geithner said Washington would not devalue the dollar for export advantage.
Analysts said Geithner's comments may mean the United States was trying to ease global tensions over exchange rates ahead of a G20 meeting in November. Washington wants China to allow more rapid appreciation of the yuan. Beijing and others complain that dollar weakness is stoking inflation by pushing money into their faster-growing economies.
A survey showing German economic sentiment wilted this month also contributed to dollar gains on Tuesday. However, few see the dollar staging an extended rally. The Fed is expected to pump more money into an increasingly sluggish U.S. economy as soon as November, a policy that is "generally corrosive to the value of a currency," said BNY Mellon strategist Michael Woolfolk.
New York Fed President William Dudley said Tuesday that employment and inflation are likely several years away from being within the Fed's comfort zone.
High-yielding currencies such as the Australian dollar and Brazilian real are also likely to attract buyers following a recent retreat, said Societe General strategist Kit Juckes.
He said the market's "gut reaction is to sell commodity block and emerging market currencies" on the China news but added the news was "not a game changer."
(Additional reporting by Jessica Mortimer in London) (Editing by Andrew Hay)