* Dollar tumbles after US GDP, remains up on the week
* U.S. economy returns to growth in third quarter
* Commodity currencies soar as oil jumps 3 percent (Updates prices, adds quote, details)
By Wanfeng Zhou
NEW YORK, Oct 29 (Reuters) - The dollar dropped on Thursday after government data showed the U.S. economy expanded in the third quarter, its first quarterly growth in more than a year, eroding the greenback's safe-haven allure.
The U.S. economy grew at a 3.5 percent annual rate in the July-September period, snapping four straight quarters of contraction and exceeding forecasts for a 3.3 percent pace.
The solid gross domestic product reading renewed optimism about a global economic recovery, sparking a sharp rally in Wall Street stocks and prompting traders to buy higher-yielding currencies such as the Australian and New Zealand dollars.
"The GDP number this morning was absolutely spectacular," said Gareth Sylvester, senior currency strategist at HiFX in San Francisco. "It really allows traders to believe in this recovery story and alleviate some of the concerns about a potential double-dip recession."
"As a consequence, you've seen the equity markets react in a very positive manner ... and that's driving the dollar weaker," he added.
In late New York trading, the euro rose 0.8 percent to $1.4828 after hitting session highs at $1.4858, according to Reuters data. For most of the year, the euro has been viewed as a proxy for risk appetite, gaining when U.S. economic data is positive.
A raft of disappointing data on the U.S. consumer and housing sectors had dented expectations about growth prospects in recent days, triggering sharp falls in stocks and broad gains in the dollar and yen.
"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 BNY Mellon in New York.
Carry trades involve 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.
COMMODITY FX RALLY
The dollar gained 0.9 percent to 91.47 yen, having hit session peaks at 91.62, according to Reuters data. The euro jumped 1.7 percent to 135.64 yen.
The ICE Futures U.S. dollar index, a measure of the greenback's value against a basket of six other major currencies, fell 0.6 percent to 75.979. Despite its losses on Thursday, the index remains on track for a weekly gain of about 0.7 percent.
Further boosting investors' inclination for risky trades was news U.S. continued jobless claims fell to their lowest in seven months, although some said the headline figure remained stubbornly high.
"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," he added.
Commodity-linked currencies posted strong gains as oil rose more than 3 percent toward $80 a barrel.
The Australian dollar was up 2 percent against the greenback at US$0.9155, while the New Zealand dollar rose 1.6 percent to US$0.7318.
The Australian dollar also rose about 3 percent against the yen, the pair's biggest one-day gain since May.