* Dollar hits lowest in 10 months vs currency basket
* Risk appetite rises after manufacturing data worldwide
* Euro trades more than 1 percent higher, above $1.44
* Sterling, Aussie, kiwi, loonie hit multi-month highs (Adds comments, details, updates prices)
By Wanfeng Zhou
NEW YORK, Aug 3 (Reuters) - The U.S. dollar on Monday fell against a basket of currencies to its lowest since September as a rally in stocks and encouraging economic data from around the world eroded the greenback's safe-haven appeal.
On Wall Street, the broader S&P 500 stock index topped the psychologically important 1,000 level for the first time in nine months. European shares ended at nine-month highs and oil rallied 3 percent to above $71 a barrel.
Positive manufacturing reports from the United States, Europe and China lifted hopes about the global economy and boosted risk appetite. That drove the euro to a 2009 high and sterling and the Australian and New Zealand dollars to their highest since autumn versus the U.S. currency.
"The bulls in the equity markets are winning the war so far and that's really determined the direction for the U.S. dollar," said Gareth Sylvester, senior currency Strategist at HiFX in San Francisco.
"So long as equity market interest remains positive, then I think the U.S. dollar is going to remain on the back foot."
In late New York trading, the ICE Futures dollar index, a gauge of the U.S. currency's performance against six other major currencies, fell 1 percent to 77.583, having fallen to 77.451, its lowest since Sept. 29.
The euro hit its highest this year at $1.4445 and was last at $1.4416, up 1.2 percent on the day, according to Reuters data.
The U.S. currency has come under heavy pressure in recent weeks as positive economic releases and earnings news dried up safe-haven demand and fueled a rally in stocks, commodities and higher-yielding currencies.
The increase in risk appetite also pushed the yen sharply lower. The dollar rose 0.7 percent to 95.27 yen, while the euro advanced 1.8 percent to 137.35 yen.
RECOVERY HOPES
U.S. manufacturing shrank again in July but slower than in June. The Institute for Supply Management said its index of factory activity rose to 48.9 in July from 44.8 in the prior month. That was above economists' expectations. A reading below 50 indicates contraction.
"It's full steam ahead for the recovery," said Alan Ruskin, chief international strategist at RBS Global Banking and Markets, in Greenwich, Connecticut.
"The July ISM data is very much in keeping with a recovery picking up some momentum, even if the overall index has yet to make its way out of the contraction zone (below 50)."
Earlier, a UK purchasing managers' index showed British manufacturing activity grew last month for the first time since March 2008, while an equivalent survey on the euro zone showed the factory sector edged closer to recovery.
Sterling rose as high as $1.6986 after earnings news from HSBC and Barclays boosted bank shares.
Adding to the positive sentiment was data out of China showing a measure of manufacturing rose to a one-year high, powered by domestic spending that helped offset anemic exports.
Among commodity-linked currencies, the Australian dollar climbed to a peak of $0.8440 while the New Zealand dollar rose to $0.6687. The Canadian dollar rose as high as C$1.0644 per U.S. dollar.
Traders said the Aussie was being supported by expectations that the Reserve Bank of Australia may drop a key reference on monetary policy easing at its meeting on Tuesday while keeping the cash rate unchanged at 3 percent.
"We continue to think a further rate cut is unlikely, and expect the RBA to be one of the first banks to start tightening rates with a 50 (basis points) hike next March," Goldman Sachs wrote in a research note. (Additional reporting by Vivianne Rodrigues; Editing by James Dalgleish)