* Dollar gains, Aussie tumbles as China raises rates
* U.S. Treasury's Geithner comments support dollar
* China move sparks risk aversion; dollar still vulnerable (Recasts, updates prices, adds detail, comment; changes byline)
By Steven C. Johnson
NEW YORK, Oct 19 (Reuters) - A surprise interest rate increase from China on Tuesday rattled currency investors, who cut exposure to risk by selling the euro and commodity-sensitive Australian dollar and taking refuge in the U.S. dollar.
Investors feared a quarter percentage point rise in China's one-year lending rate could dampen Chinese and global growth and slow China'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. "They are 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 $0.9789.
The euro, yen and sterling also fell sharply, with the euro down 0.9 percent at $1.3820, off a $1.4003 session peak. The dollar rose 0.6 percent to 81.72 yen, its best daily gain since Japan intervened to weaken the yen on Sept. 15.
The dollar hit a 15-year low beneath 81 yen last week, not far from a 79.75 record low set in 1995.
The U.S. currency also rose 1.7 percent to 1.0350 Canadian dollars after the Bank of Canada left interest rates at 1 percent and cut is growth forecast.
DOLLAR REBOUND
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.
China's move accelerated the dollar rebound, as did a survey showing German economic sentiment fell in October.
The dollar also got a boost late Monday after Treasury Secretary Timothy Geithner said the United States would not devalue the dollar for export advantage.
Analysts said Geithner's comments may mean the United States was trying to ease recent global tensions over exchange rates ahead of a G20 meeting in November. Washington wants China to allow more rapid appreciation of the yuan, while Beijing and others complain that dollar weakness is sending hot money into their economies and driving up inflation.
But few expect the dollar to stage an extended rally. The Fed is expected to move as soon as November to pump more money into an increasingly sluggish U.S. economy, 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, comments that traders said suggests that more easing is nearly certain.
Woolfolk said near-term support for the euro was seen around 1.3775, the 23.6 percent retracement of a move from $1.2990 in early September to $1.4157 last week, followed by $1.3700.
High-yielding commodity currencies such as the Australian dollar are also likely to attract buyers following their recent pullback, 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 Theodore d'Afflisio)