* Chinese stocks fall 5 percent, hitting emerging markets
* Earnings help lift European stocks 0.4 percent
* Dollar, yen gain slightly
By Jeremy Gaunt, European Investment Correspondent
LONDON, July 29 (Reuters) - A late sell-off on Shanghai's stock market depressed emerging market stocks on Wednesday and took Asian shares off multi-month peaks, although the mood failed to carry over into Europe.
European shares were higher in early trade, lifted by positive earnings news despite losses in China that have sometimes heralded a global stock market retreat.
Chinese stocks fell 5.0 percent in heavy turnover, posting their biggest daily drop in eight months and ending a five-day liquidity-driven rally. At one point, stocks were close to 8 percent lower.
Investors were concerned that major Chinese banks may start to restrict lending to cool various booming markets. Chinese stocks, for example, had risen close to 89 percent this year before Wednesday's fall.
That led MSCI's broad emerging market stock index down 1.3 percent, after it hit a 10-month high on Tuesday.
European shares gained, however, partly as a result of positive results from Bayer and drugmaker Sanofi-Aventis.
The pan-European FTSEurofirst 300 index of top shares was up 0.4 percent.
Some investors have nonetheless been suggesting that the global equity market rally that began in March is not immediately sustainable.
"Given the speed and strength of the recent rally, we are tending toward a wait and see approach before adding to our overall equity exposures," U.S.-based money manager GMO said in a note.
FLIGHT TO QUALITY
The dollar and yen gained broadly while perceived higher risk currencies came under heavy selling pressure, partly as a result of the Shanghai sell off.
U.S. data on Tuesday also showed a slide in consumer sentiment during July, encouraging investors to take profits from a sharp risk rally that has driven currencies such as the Australian dollar higher, along with the euro.
The dollar was up 0.1 percent against a basket of major currencies and the euro lost about the same to $1.4166.
"We have had a very strong rally in risky assets and the market has been looking for reasons to take profit," said Michael Klawitter, senior currency strategist at Dresdner Kleinwort.
Euro zone government bonds gained traction on the Chinese stock losses.
The two-year Schatz yield was at 1.356 percent, off an early high of 1.393 percent, while the 10-year Bund yielded 3.427 percent, also off the session high of 3.511 percent. (Additional reporting by Jessica Mortimer; editing by Patrick Graham) (To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Hub click on http://blogs.reuters.com/hedgehub)