* Yen gains vs euro, dlr, pound slides
* European stocks fall 1 percent as Citigroup optimism fades
* High-yielding Australian and New Zealand dollars tumble
(Changes dateline, byline, adds quotes; previous TOKYO)
By Jessica Mortimer
LONDON, Nov 25 (Reuters) - The yen gained against the euro and the dollar on Tuesday as global recession fears returned to haunt financial markets, sending stock markets lower as investors shunned higher risk assets.
Boosting the low-yielding yen was a slide in European shares after optimism on news of a U.S. government bailout of Citigroup quickly dissipated.
"Given the scale of the rally in risk assets (on Monday) investors are reassessing the situation and are less willing to chase the rally higher," BTM-UFJ currency economist Lee Hardman said.
"The underlying conditions are not conducive for further gains in risk assets, with below-trend growth across the globe and financial markets in a severe state of distress".
Highlighting the grim outlook facing the global economy, the World Bank on Tuesday said China's growth could slow to its weakest pace in almost two decades next year.
By 0942 GMT, the dollar had fallen 1.2 percent against the yen to 95.95 yen, and the euro dropped 1.5 percent to 123.40 yen .
The euro came under selling pressure as European shares fell 1 percent, reversing an 8.9 percent rally on Monday which had helped to boost the single currency to its highest levels against the dollar and the yen in more than two weeks.
The euro fell 0.4 percent to $1.2860, sliding after confirmation 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 pound also dipped 0.2 percent against the dollar as Monday's optimism about stimulative measures announced in the 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, while U.S. consumer confidence numbers for November and the Richmond Fed index at 1500 GMT will also be closely eyed.
HIGH-YIELDERS SLUMP
The high-yielding Australian and New Zealand dollars lost over 2 percent against the U.S. currency. Against the yen they dropped more than 3 percent.
High risk aversion has boosted the low-yielding yen to the detriment of the Australian and New Zealand currencies, as investors unwind carry trades that involved using the Japanese currency to fund investments in higher-yielding currencies.
The dollar has also benefitted 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.
Given ongoing economic weakness, the European Central Bank is expected to cut interest rates further from 3.25 percent in December. Other central banks are expected to follow suit, taking them closer to 0.3 percent rates in Japan and the Federal Reserve's 1.0 percent.
"The compression of yield between the rest of the world and Japan and the U.S. will be supportive for further gains in the yen and the dollar," BTM-UFJ's Hardman said. (Reporting by Jessica Mortimer, editing by Mike Peacock)