* Yen, dollar gain, global economy concerns curb risk demand
* European shares hit 7-week low
* July 8-10 G8 meeting eyed for FX diversification debate
(Adds comment, detail, updates throughout, changes byline)
By Naomi Tajitsu
LONDON, July 6 (Reuters) - The yen and the dollar gained broadly on Monday on eroding optimism about an improvement in the global economy, dragging equities lower and prompting investors to shun risk and buy currencies perceived to be safe.
Currencies including the Australian dollar and sterling, which have tended to benefit the most from any signs the global economy is on the mend, fell sharply as the fallout from grim U.S. jobs data last week continued.
Analysts said traders were coming to terms with signs recent economic data have not been consistently better-than-expected as in past months, and that it was possible for future readings to show weakness.
"The market is taking profit on the 'green shoots' trade that it has had on for the past few months and it's reacting to the possibility that things may be looking more ropy," said Paul Mackel, director of currency strategy at HSBC in London.
"At the end of the day, there's a flight to more liquid currencies when risk aversion rises. That puts the dollar in the framework to benefit, and the yen to a certain extent as well."
By 1125 GMT, the dollar index, which tracks its performance against a basket of six major currencies, was up half a percent on the day at 80.804. A 1.6 percent fall in European shares helped to boost the U.S. currency.
The euro fell 0.5 percent to $1.3892, its lowest in nearly two weeks. Also prompting euro weakness was a survey showing an unexpected worsening in euro zone Sentix index, which tracks investor and analyst sentiment.
The yen was the biggest beneficiary of risk aversion, pushing the dollar down 0.9 percent to 95.22 yen.
The Japanese currency also rallied on the crosses, pushing the euro down 1.2 percent to 132.46 yen, its weakest in nearly two weeks, while sterling fell roughly 2 percent to 153.16 yen, its weakest since late May.
Sterling, which is often seen as higher risk, fell 1.5 percent to a one-month low versus the dollar of $1.6095. The Australian dollar lost 1 percent to $0.7879.
G8 SUMMIT IN FOCUS
Traders awaited a Group of Eight summit on July 8-10, to see if the possibility of reserve diversification is discussed.
This week also sees central bank policy decisions in Australia and the UK, while the U.S. second quarter earnings season gets underway.
Though any diversification of central bank reserves away from the dollar would take several years to materialise, investors are jittery about what comments may be made at this week's G8 meeting, particularly by China.
Analysts said they did not expect serious concerns to be raised about the issue this week, but some said the dollar's short-term vulnerability to comments about reserves suggested improving global fundamentals in the future may open the door to dollar weakness. "While it may be too early to sell USD, the fact that the discussion has become so public suggests that USD weakness would accompany a global recovery as confidence is restored in the medium and long term," Barclays analysts said in a note.
The dollar was lent some support by reassurances from China, which said at the weekend that the U.S. currency would remain dominant for "many years to come".
In comments published on Monday, however, Chinese officials said the financial crisis had laid bare defects in the dollar-led global economy and the world should look to displace the U.S. currency, even if it takes many years.
(Additional reporting by Jessica Mortimer; Editing by Chris Pizzey)