* Yen drops, correcting Wednesday's gains; dlr also down
* Higher risk FX recover as European equities rise 1.1 percent * Sterling shines as BoE keeps QE target unchanged
* Aussie gains but Australia-China rift casts a shadow
(Updates prices, adds quotes)
By Jessica Mortimer
LONDON, July 9 (Reuters) - The yen and the dollar fell on Thursday, correcting some of the previous session's gains, while sterling extended gains after the Bank of England kept its quantitative easing target unchanged.
A recovery in European stocks helped to buoy the euro and perceived higher risk currencies, which fell sharply on Wednesday as optimism about the global economy's recovery prospects waned and investors trimmed risk exposure.
European equities jumped by 1.1 percent, snapping a five-session losing streak and pushing the yen lower after it surged broadly on Wednesday, hitting a five-month high against the dollar.
Analysts noted, however, that the current moves are corrective and do not represent any fundamental shift in market sentiment.
"We had a massive move yesterday and the market really needed to correct," Brown Brothers Harriman currency strategist Audrey Childe-Freeman said.
"The scale of the rally (in the yen) was overdone and we have seen some position adjustments, but the market is still looking quite nervous," she said.
Sterling outperformed meanwhile after the BoE left its asset buying programme at 125 billion pounds, just as most in the market had expected the central bank to expand the total by 25 billion pounds..
At 1150 GMT, the dollar rose 0.1 percent from late U.S. trade to 92.94 yen, having hit a five-month trough of 91.80 on EBS trading systems the previous day.
The euro climbed 0.8 percent to 129.91 yen after falling as low as 127.00 yen on Wednesday, its lowest since mid-May.
Wednesday's sharp rise in the yen prompted Japan's top government spokesman to say excessive foreign exchange moves were undesirable, while Japanese officials said they were keeping a close watch on currencies.
For an article on whether Japan will intervene to curb the yen's rise click on.
The dollar index fell 0.7 percent to 80.194, while the euro was up 0.7 percent at $1.3978 after falling as low as $1.3830 on Wednesday.
STERLING SHINES
Sterling jumped by 1.2 percent against the dollar to $1.6255 , while the euro lost 0.5 percent against the UK currency to 85.98 pence as the pound extended gains after the Bank of England policy decision.
The news that it was not expanding quantitative easing came as the central bank left key interest rates unchanged at 0.5 percent, as widely expected.
"The Monetary Policy Committee has sent a clear signal that the endgame for QE has arrived," RBS economist Ross Walker said, who described the decision to leave the QE target unchanged as "a significant surprise".
Among other currencies seen as higher risk, the Australian dollar recovered 0.7 percent to $0.7842, though analysts said the currency is highly sensitive to concerns about Australia's ties with its top trading partner China.
China confirmed on Thursday the arrest of an Australian mining executive and three others on spying allegations, in a case that has raised questions about China-Australia relations.
These concerns cast a further shadow against the currency on Wednesday, when it fell more than 1 percent against the dollar and 3.5 percent against the yen.
"If there were a freezing in the diplomatic temperature between Australia and China that would not be positive for the Australian dollar," Rabobank currency strategist Jeremy Stretch said.
(Reporting by Jessica Mortimer; Editing by Victoria Main)