FOREX-Yen rises broadly on stock fall, Japan election

* Market cheers opposition win in Japanese vote

* U.S. Midwest business on cusp of growth in August

* Chinese stocks drop 6.7 percent, stoking risk aversion

* Dollar gains versus Aussie, Canadian dollars (Updates with reaction to U.S. data, adds comments, updates prices)

By Wanfeng Zhou

NEW YORK, Aug 31 (Reuters) - The yen rose to a 7-week high against the dollar and gained versus other currencies on Monday buoyed by a decisive opposition victory in Japanese elections and as declines in global equities stoked risk aversion.

A 6.7 percent slump in Chinese stocks sent investors flocking to the yen for safety. The U.S. dollar, another safe-haven currency, also rose against perceived higher-risk currencies, such as the Australian dollar.

"There's a bit of risk aversion in the market this morning, really on the back of (the fall in) Chinese equities," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto.

A landslide win Sunday by the Democratic Party of Japan (DPJ) sparked hopes that new policies will support consumer spending in an economy trapped in deflation and haunted by a weak growth outlook. For details, see [ID:nT356076]

While the outcome lifted the Japanese currency, traders said gains could be limited on jitters over what a new government may herald.

The dollar gave up gains versus the euro to hit session lows after data showed business activity in the U.S. Midwest picked up at a faster pace than expected in August, although the details of the report were less upbeat. The Institute for Supply Management-Chicago business barometer rose to 50.0 from 43.4 in July. [ID:nN28382729]

"Fifty is the midpoint for growth or contraction, so that's important. But the August number was likely affected by the 'Cash for Clunkers' program," said Jacob Oubina, currency strategist at Forex.com in Bedminster, New Jersey.

He added that the employment component of the index only rose slightly and is still well below the growth level of 50. "So that's still a concern."

In mid-day New York trading, the dollar was down 0.7 percent at 92.79 yen , having earlier hit a low of 92.53 yen, according to Reuters data, its weakest level since mid-July.

The euro lost 0.5 percent to 133.08 yen , while the single European currency recouped earlier losses against the dollar to trade 0.2 percent higher at $1.4336 .

Trading was quiet, however, with U.K. markets closed for a public holiday. The focus is on key events later in the week, including a European Central Bank policy meeting on Thursday and U.S. non-farm payrolls figures due on Friday.

(Additional reporting by Steven C. Johnson; Editing by Jeffrey Benkoe)