* Dollar under pressure as risk appetite warms
* Dollar index down 0.5 percent at 80.087
* Yen sold in non-dlr cross trades as investors seek yield
(Adds new quotes, updates prices, changes dateline pvs TOKYO)
By Tamawa Desai
LONDON, May 29 (Reuters) - The dollar fell towards a five-month low against a basket of currencies on Friday and the yen also dropped as signs the global recession may have passed its worst prompted investors to seek riskier assets.
With global share prices near a year's high, investors were encouraged to dump the dollar, which they had hoarded during the worst of a global financial crisis last autumn.
"We're back to the pro-risk theme, as markets continue to anticipate growth to return in the second half of the year," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. "That will cause the dollar to underperform."
At 0807 GMT, the dollar index, a gauge of the U.S. currency's performance against six major currencies, fell 0.5 percent to 80.128.
It is now down roughly 5.5 percent for the month, on track for its biggest monthly fall since dropping more than 6 percent in December.
The index struck a five-month low of 79.805 late last week on concerns U.S. government debt may lose its top-notch 'AAA' rating.
Those worries receded as a series of successful U.S. Treasuries auctions indicated healthy demand for U.S. debt.
But news that South Korea's National Pension Service (NPS) would reduce exposure to U.S. government bonds and equities in its five-year portfolio added pressure on the dollar.
The NPS is expected to manage 432 trillion won ($343.7 billion) by the end of 2014, and U.S. government bonds account for 83 percent of the pension fund's direct holdings of foreign bonds, which are currently worth $6.5 billion.
EURO HOVERS NEAR $1.40
The euro hovered near the key $1.40 level, in sight of last week's peak of $1.4051, its strongest since early January.
Sterling gained 0.8 percent to $1.6063, close to a near seven-month high.
The dollar also hit an eight-month low against the Australian dollar and the New Zealand dollar.
The dollar fell 0.6 percent against the yen to 96.31 yen, due partly to selling by Japanese exporters, but was well above a two-month trough of 93.85 yen marked last week.
The yen was sold against most currencies apart from the dollar, as investors sought higher returns.
"We are in a transition phase for broader yen underperformance as global long-term yields rise," Hardman said. "The yen may become the funding currency of choice."
Nippon Life, Japan's biggest life insurer, said on Friday the allure of U.S. Treasuries had grown and they looked appealing for forex-hedged investors compared with Japanese government bonds -- the yield differential is now about 200 basis points.
The yen fell to an eight-month low against the Australian dollar of 76.38 yen.
The euro was steady at 134.90 yen, near a seven-week peak of 135.30 yen hit on Thursday when it climbed more than 2 percent against the Japanese currency.
"The firmness in stocks has boosted Japanese retail investors' risk appetite," said Tsutomu Soma, a senior manager in the foreign securities department at Okasan Securities, adding that household investors' money is also flowing out of the country through pension funds.
On Wednesday, Japanese retail investors poured $2.4 billion into mutual funds including foreign investments, in the biggest single-day of fund launches this year. (Additional reporting by Masayuki Kitano in Tokyo)