* Dollar index down 6.2 percent in Q2, up 1.2 pct in June
* Moves exacerbated by month-end, quarter-end flows
* VIX index returns to pre-Lehman Brothers levels
* Currency volatility declines as well (Adds comments, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, June 30 (Reuters) - The dollar advanced against a basket of major currencies on Tuesday after a report showing an unexpected drop in U.S. consumer confidence for June prompted investors to seek shelter in the greenback.
The weak consumer confidence report drove Wall Street stocks lower, revived the dollar after an early sell-off and dampened hopes of an imminent global economic recovery.
"The market is getting comfortable with the 'green shoots' theory so investors need a high hurdle for them to buy currencies other than the dollar," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.
"We're still seeing stress and strains in the market. We're going into the earnings season now that the second quarter has ended and people are cautious."
The ICE Futures' dollar index, however, ended the second quarter on a weak note, down 6.2 percent -- its first quarterly drop since the first three months of 2008. On the month, the dollar index rose 1.2 percent.
Analysts also said the simultaneous end to the month, quarter and first half of the year led to increased volatility in foreign exchange trading, exacerbating intraday moves in currencies.
But these month-end and quarter-end flows have supported the dollar, analysts said, as investors sought to rebalance portfolios.
In late afternoon trading in New York, the euro last changed hands down 0.4 percent at $1.4024 after trading as high as $1.4152 earlier, according to Reuters data. Still, the euro was up 5.9 percent in the second quarter, its best quarterly performance since March 2008.
The dollar index, which measures the value of the greenback against a basket of currencies, traded up 0.5 percent on the day at 80.202.
DOLLAR DOWN VS YEN IN Q2
The dollar also rose 0.24 percent against the yen 96.36 yen. It fell 2.7 percent in the second quarter, but was up 1.2 percent in June.
Dollar buying ensued after a report showed the Conference Board's U.S. consumer confidence index fell in June to 49.3 from a downwardly revised 54.8 in May. Economists polled by Reuters had forecast a reading of 55.0.
The confidence index followed a report showing a smaller-than-expected decline in U.S. home prices in April and a Chicago purchasing managers' report on business activity in the U.S. Midwest.
Investors have sold U.S. dollars recently as stock markets and oil prices rose on an upbeat view for prospects of a global economic rebound, hurting demand for the greenback as a safe haven.
The MSCI global stocks index, which fell 0.7 percent on Tuesday, posted its best quarterly gain since its launch in 1988 at 21.2 percent. Oil, meanwhile, hit an eight-month high of $73.38 a barrel earlier, but dropped more than 2 percent as the dollar strengthened.
The expectation of global economic improvement gained support from the CBOE Volatility Index, Wall Street's fear gauge, which on Tuesday fell to its lowest level since Sept. 12, just before Lehman Brothers collapsed.
That pushed currency volumes lower, too, with the one-month implied vols in euro/dollar falling to 12.6 on Tuesday from about 23.2 at the start of the year. Some analysts say the drop in currency volatility could trigger a downturn in the dollar.
Others, on the other hand, are not buying the decline in vols and current market uncertainty should ensure that volatility remains elevated.
"If there is any certainty ahead on the policy front, it is elevated uncertainty and it will make for higher volatility ... in asset prices and FX," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut.
"The longer-term direction is another story -- though the consensus view of weak U.S. Treasuries and dollar is compelling -- the only difference for me from mainstream is that I would throw lower stocks in as well.