* U.S. manufacturing sector grew in October -ISM
* U.S. stocks reverse morning's gains
* Fed official says U.S. banks still at risk (Updates prices, adds quotes, details, changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Nov 2 (Reuters) - The dollar and yen slid on Monday as reports showing further evidence of an economic recovery around the world dampened safe-haven demand for the U.S. and Japanese currencies.
U.S. data showed sharp improvements in manufacturing, construction and housing, encouraging investors to buy riskier assets with higher yields.
By early afternoon, the three major U.S. stock indexes had turned negative on concerns about banks' soured loans and as investors worried about whether the seven-month rally has run out of steam. Earlier, stocks had climbed about 1 percent on the strong economic data.
Commodity prices, on the other hand, held gains, lifting commodity-linked currencies such as the Australian and Canadian dollars.
"The pattern in which stocks and the euro are correlated is intact. As stocks rise, so does the euro," said Marc Chandler, global head of FX strategy at Brown Brothers Harriman in New York.
"But I don't think we're out of this consolidation and correction in stocks, and even in the euro. I'm not convinced that the downside correction in the euro is over."
For much of the past year, the euro has had a positive correlation with moves in the stock market, falling when good economic data and rising share prices boost risk appetite. The 25-day correlation between the euro and the S&P 500 is at a robust 0.83 on Monday, according to Reuters data.
In early afternoon trading, the euro rose 0.2 percent to
$1.4749 after climbing as high as $1.4845
Analysts said the slide in stocks and the euro began after a Federal Reserve official said U.S. banks remained at risk over soured property loans. That pushed the euro to as low as $1.4728.
Against the yen, the dollar gained 0.3 percent to 90.33 yen after falling as low as 89.18 yen per dollar on electronic trading platform EBS. The euro rallied 0.5 percent to 133.23 yen.
The ICE Futures U.S. dollar index, a measure of the greenback's value against a basket of six major currencies, was up 0.1 percent for the day at 76.378.
Losses in the dollar and the yen accelerated earlier in the session after U.S. manufacturing activity rose to its highest level in 3-1/2 years last month, offering hope the budding economic recovery would be sustained.
Other reports showed pending home sales, for homes under contract to be sold, unexpectedly surged in September and construction spending posted its largest gain in a year in September.
"All the numbers show stabilization and the start of some expansion. That's a continuation of what we've been seeing for the past couple of months," said Thomas Nyheim, vice president and portfolio manager at Christiana Bank & Trust Co. in Greenville, Delaware. (Additional reporting by Wanfeng Zhou; Editing by Jan Paschal) (gertrude.chavez@thomsonreuters.com; +1 646 223 6322; Reuters Messaging: gertrude.chavez.reuters.com@reuters.net))