* Dollar gives back gains from best run in months
* U.S. GDP better than expected, weighs on dollar
* U.S. jobless claims further boost risk sentiment (Updates prices, adds quote)
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 29 (Reuters) - The dollar fell against the euro on Thursday after data showed the U.S. economy returned to growth in the third quarter, reducing the greenback's safe-haven allure and sending investors elsewhere for better returns.
The solid gross domestic product reading renewed optimism about recovery in the global economy, prompting traders to buy higher-yielding currencies such as the Australian and New Zealand dollars.
"The (GDP number) was definitely above expectations," said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto. "Though only a first estimate this will help to arrest some of the strong U.S. dollar buying on risk aversion that we have seen over the past few sessions. GDP will dominate."
According to the government's first estimate, the U.S. economy grew at a 3.5 percent annual rate, the fastest pace since the third quarter of 2007 and slightly better than forecasts of a 3.3 percent rise.
A raft of weak U.S. data in the last two weeks had dented expectations about growth prospects, triggering sharp falls in stocks and broad gains in the dollar and yen.
Further boosting investors' appetite for risky trades, analysts said, was news of a modest fall in weekly U.S. jobless claims, although some said the headline figure was stubbornly high. Initial claims were at 530,000 in the latest week.
"The sustainability of this recovery depends on the improvement of U.S. labor conditions," said Boris Schlossberg, director of FX research at GFT in New York, adding:
"The (jobless claims) figure remains stubbornly above the 500,000 barrier and until it drops below that level the market will not be fully confident that the recovery has taken hold."
In mid-morning trading, the euro rose 0.5 percent to $1.4788 after hitting session highs above $1.4800. For most of the year, the euro has been viewed as a proxy for risk appetite, gaining when economic data is positive.
The dollar gained 0.6 percent to 91.20 yen, having hit session peaks at 91.45 after the data was released.
The Australian dollar was up 1.2 percent against the greenback at US$0.9083 while the New Zealand dollar rose 1 percent to US$0.7276.
The New Zealand dollar had fallen to a three-week low earlier after the Reserve Bank of New Zealand dropped its monetary policy easing bias as expected but faced down market pressure for an interest rate rise as soon as early 2010. (Additional reporting by Nick Olivari; Editing by James Dalgleish)