* Dollar hits year's low vs euro, currency basket
* Equity rally suggests further improvement in risk appetite
* PMI from China, Europe add global economy optimism
* General Motors to file for bankruptcy
(Adds quotes, updates prices)
By Naomi Tajitsu
LONDON, June 1 (Reuters) - The dollar fell sharply on Monday, tumbling to its lowest so far this year against a basket of currencies and the euro, because optimism that the global economy is on the road to recovery is boosting riskier assets.
Commodity-related currencies including the Australian and New Zealand dollars -- which are considered to be higher risk -- performed particularly well, hitting 8-month highs against their U.S counterpart as oil prices jumped to a 7-month peak and European shares soared 2 percent.
The dollar suffered before an expected bankruptcy protection announcement by General Motors Corp later on Monday. U.S. Treasury Secretary is visiting China to reassure Beijing that U.S. assets are sound, while throwing his support behind a strong dollar.
Other major market factors this week include European Central Bank and Bank of England meetings, where both are widely expected to keep interest rates on hold at low levels, as well as crucial U.S. jobs data.
Analysts said higher shares and stronger-than-expected purchasing managers' surveys on the euro zone and UK manufacturing sectors, which followed strong Chinese PMI data, lent further credence to the notion that the global economy is on the mend and dented the U.S. currency.
"It's the same story we've seen in the past week -- the return of risk appetite and equity buying. The market is buying into the end-of-recession story," said Audrey Childe-Freeman, currency strategist at Brown Brothers Harriman in London. "As long as there is the perception that risk appetite is returning to the market and the worst of the downturn is behind us the dollar will remain vulnerable and higher yielders will benefit, including sterling and the Aussie and kiwi."
Some analysts said that GM's expected bankruptcy announcement would eliminate some uncertainty about the ailing U.S. auto industry, which was boosting risk appetite and stinging the dollar.
Others said that the U.S. government's pledge of an additional $30 billion to rescue GM had inflamed long-running concerns about how Washington will fund its plans to help its struggling economy.
Market participants also awaited the latest U.S. ISM survey on manufacturing activity at 1400 GMT..
By 1104 GMT, the dollar index was down 0.7 percent at 78.687 , having hit its lowest since mid-December at 78.586 in early European trade.
The euro gained 0.6 percent on the day to $1.4236, having rallied as high as around $1.4245, its strongest since late December. The dollar also fell 0.7 percent to 94.70 yen.
Among perceived higher risk currencies, sterling rose to its highest in seven months against the dollar at $1.6432, while the Australian and New Zealand dollars hit eight-month highs of $0.8137 and $0.6520 respectively.
IMPROVING DATA
Adding to optimism that the global economy may be over the worst of the recession, the final euro zone PMI manufacturing index climbed to a seven-month high of 40.7 in May, up from the provisional estimate of 40.5.
The UK manufacturing PMI was also stronger than expected, showing the slowest contraction in the sector in a year. Earlier the Chinese PMI came in at 53.1 in May, and while this marked a fall from 53.5 in April, it was the third month in a row that the reading has been above the 50 level that separates expansion from contraction..
Analysts are beginning to question just how much further the broad rally in riskier assets can run, however, given sharp gains in recent weeks even as many the market still question the prospects for economic recovery.
"Optimism is certainly gaining ground, but the question is whether this is just a bear market rally or whether it is something more sustained than that," SEB currency strategist Johan Javeus said.
"The PMIs have been improving but at some point the market will need to start seeing this improvement reflected in the hard economic data," he added.
(Additional reporting by Jessica Mortimer; Editing by Ruth Pitchford)