FOREX-Dollar, yen subdued even as stocks rise

* European shares up 1.2 pct after Shanghai rallies 4.5 pct

* Norwegian crown boosted as GDP unexpectedly grows

* Sterling down as UK public finances weigh

(Adds comment, details, updates prices)

LONDON, Aug 20 (Reuters) - The yen initially slipped on Thursday as a recovery in Chinese shares raised some risk appetite, but losses were trimmed as markets looked to U.S. equity markets for direction in thinned holiday trade.

Currency traders took cues from a 4.5 percent gain in the Shanghai Composite Index <.SSEC> on Thursday, which helped to pull European shares <.FTEU3> up 1.2 percent.

"Chinese stocks bounced back which helped some higher risk currencies but it's mostly subdued now as the markets are waiting to see whether U.S. stocks bounce back," said Geoffrey Kendrick, senior currency strategist at UBS.

U.S. S&P 500 stock futures index was up 0.2 percent , pointing to a higher open on Wall Street.

By 0938 GMT, the dollar was flat against the yen at 94.11 yen after hitting to a session high of 94.55 yen .

Traders cited options with a strike price around 94.00 yen were set to expire later in the day, keeping the pair near that level.

The euro was down 0.1 percent at 133.77 yen , after rising to 134.62 yen earlier. Against the dollar, the single currency was little changed on the day at $1.4232 .

Market participants have been focusing on Shanghai stocks after it shed nearly 20 percent in the past two weeks, rattling investor confidence in a global recovery.

"It is an understandable reaction as Chinese equities have acted as a good leading indicator for broader market dynamics over the past year," Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ said in a note.

But he said perceptions that China's economic recovery is essential to global recovery may be overdone.

"We would argue that the equity market has been largely liquidity fuelled rather than a true reflection of the improvement in the Chinese economy," and the recent correction may just be reflecting valuations that are more in line with fundamentals, he said.

Meanwhile, China's People's Daily said on Thursday China has no choice but to increase its holdings of U.S. government debt for now, adding diversifying the nation's foreign exchange holdings would be a painstaking shift. [nPEK166274]

NORWEGIAN CROWN JUMPS

The Norwegian crown jumped, rising against the euro to its highest level since March, after data showed Norway's non-oil economy rose an unexpected 0.3 percent in the second quarter. [ID:nLK495277]

That came after the Norges Bank said last week interest rate increases could take place earlier than during the second quarter of 2010 as inflation remains benign and the economy is stabilising.

"There is potential for Norway to be the first country to raise interest rates, and that should be positive for the crown," said UBS's Kendrick.

The euro fell as low as 8.5495 crowns , its lowest since March 24, according to Reuters data. It was last down 0.1 percent at 8.6093.

Australia is also seen as another country that may raise rates sooner than most of its G10 peers. The Australian dollar was flat on the day at $0.8303 .

Sterling fell 0.3 percent to $1.6475 as weak data on British public finances highlighted concerns about the country's fiscal situation and offset solid retail sales numbers. (Additional reporting by Naomi Tajitsu; editing by David Stamp and Andy Bruce)