FOREX-Dollar tumbles as U.S. recession ends

* 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 slid against most currencies 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.

"With Q3 GDP living up to its billing this morning, players are returning to the carry trade again, driving the dollar and yen decidedly lower," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

Carry trade involves selling low-yielding currencies such as the dollar and yen and buying units with relatively higher interest rates such as the Australian and New Zealand dollars.

Woolfolk said earlier this week market participants were more bearish on the U.S. economic outlook, which suggested that dollar gains could be sustained as investors flee risky assets and seek shelter in the greenback.

"What we saw this morning (from the GDP report) better supports the notion that the dollar rebound was a temporary adjustment in positioning and that we are returning to familiar post-Lehman trends."

According to government data, 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. For more see [ID:nN29354547].

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.

In midday trading, the euro rose 0.5 percent to $1.4788 after hitting session highs at $1.4826. For most of the year, the euro has been viewed as a proxy for risk appetite, gaining when economic data is positive.

Further boosting investors' inclination for risky trades on Thursday, analysts said, was news U.S. continued jobless claims fell to their lowest level in seven months, although some said the headline figure remained stubbornly high. Initial claims were at 530,000 in the latest week.

"The (jobless claims) figure remains...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," said Boris Schlossberg, director of FX research at GFT in New York.

"The sustainability of this recovery depends on the improvement of U.S. labor conditions."

The dollar gained 0.8 percent to 91.34 yen , having hit session peaks at 91.45 after the data was released.

The Australian dollar was up 1.9 percent against the greenback at US$0.9151, while the New Zealand dollar rose 1.7 percent to US$0.7325 .

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. [ID:nSYD80874] (Editing by Chizu Nomiyama)