* Yen gains vs euro, dlr, pound slides
* Risk aversion high; shares recoup loss in choppy trade
* High-yielding Australian and New Zealand dollars tumble
(Changes dateline, byline, adds quotes, updates prices)
By Naomi Tajitsu
LONDON, Nov 25 (Reuters) - The yen gained broadly on Tuesday, while currencies with high yields fell as global recession fears returned to haunt financial markets, keeping stock markets volatile and risk demand low.
Boosting the low-yielding yen was an early slide in European shares after optimism about news on Monday that the U.S. government would rescue Citigroup quickly dissipated.
Analysts said the market remained jittery about ongoing problems in the banking sector, which kept demand high to unwind carry trades which use the yen to buy assets in higher-yielding currencies like the Australian and New Zealand dollars.
"The market is still braced for more news on bank rescues, which could potentially be positive," said Michael Hart, currency strategist at Citigroup in London.
"But the fact that we're still looking for new policy measures after all that has been done is a negative sign," he added.
Ongoing signs of deep economic weakness also kept risk demand low, while comments from Bank of England Governor Mervyn King that he may need to cut UK interest rates more than expected reminded investors that more big rate cuts were in the pipeline.
Meanwhile, media reports quoted European Central Bank Governing Council member Ewald Nowotny as saying that the central bank wants to keep some rate ammunition in reserve, bolstering the view that the ECB would refrain from aggressive cuts seen by the BoE
The dollar fell 0.8 percent to 96.23 yen, while the euro dropped 1.17 percent to 123.15 yen.
Putting selling pressure on the single European currency was a 1 percent fall in European shares in early trade, reversing a near 9 percent rally on Monday.
Stocks recovered to edge up 0.7 percent by 1138 GMT, with analysts citing month-end demand for stocks to rebalance investment portfolios, but gains were limited as few traders were interested in taking on significant risk.
MORE EVIDENCE OF RECESSION
The euro fell 0.3 percent to $1.2868, extending losses after data released early in the European session confirmed that the German economy contracted by 0.5 percent in the third quarter.
"The two former mainstays of the German upswing, investment in machinery and equipment and exports, have ... developed into handicaps -- hardly an encouraging omen for 2009," Commerzbank economist Christoph Weil said in a note to clients.
Other surveys showed falls in confidence among French businesses and Italian consumers.
The high-yielding Australian and New Zealand dollars lost more than 2 percent against the U.S. currency, while dropping more than 3 percent against the yen as investors continued to unwind carry trades.
The dollar has also benefited from a sharp drop in risk appetite as positions in risky investments are closed out and their proceeds are converted back to the U.S. currency.
The pound fell 0.6 percent to a session low of $1.5057, stung after the BoE's King said he may need to cut rates more than the central bank would otherwise as banks have been slow to pass on the effects of lower rates to customers.
Traders also shed sterling positions after Monday's optimism about stimulatory measures announced in the UK government's Pre-Budget report gave way to renewed fears about the weak economic outlook and rising levels of debt.
Investors awaited preliminary data on U.S. economic growth in the third quarter at 1330 GMT as evidence mounts that the U.S. economy is in a recession as the credit crisis continues to batter the financial and auto industries.
U.S. consumer confidence numbers for November and the Richmond Fed index at 1500 GMT will also be closely eyed to better gauge the health of the U.S. economy.