GLOBAL MARKETS-Equities recover from China shock, dollar slips

* Markets recover after surprise China hike

* European stocks lifted by UK QE prospects

* Dollar slips against major currencies

By Jeremy Gaunt, European Investment Correspondent

LONDON, Oct 20 (Reuters) - Financial markets on Wednesday recovered some of the composure lost after China's surprise interest rate hike, with stocks slightly higher and the dollar falling back from the previous session's sharp gains.

Wall Street also looked set for small gains following Tuesday's 1.6 percent loss on the S&P 500 index <.SPX>.

China triggered a global risk sell-off on Tuesday when the People's Bank of China's (PBOC) raised benchmark interest rates by 25 basis points, the first increase in nearly three years.

The move stoked fears among investors about further tightening in one of the global economy's main drivers and coincided with an increase in tensions over global currency policies ahead of a meeting of Group of 20 finance ministers this weekend.

Investors also digested news that Bank of America and possibly other U.S. banks may be forced to take back billions of dollars in mortgages that should not have been bundled into bonds.

Such concerns have brought to a halt a solid risk rally that saw MSCI's all-country world index <.MIWD00000PUS> hit a more than two-year high last week.

The underlying driver for the rally -- the Federal Reserve's expected buying of assets under a renewed quantitative easing programme -- remains in place.

But there are also jitters about whether this will be scaled back as a result of the week G-20 meeting.

Equity markets were playing it relatively safe.

The MSCI index was up 0.1 percent while Europe's FTSEurofirst 300 <.FTEU3> was up about 0.3 percent, helped by the latest Bank of England Monetary Policy Committee minutes, which boosted expectations of further UK quantitative easing.

Earlier, Japan's Nikkei <.N225> closed down 1.65 percent, with exporters shaken by fears of slowing Chinese growth.

DOLLAR SLIPS

The dollar fell against a basket of currencies for the first time in four sessions as appetite for higher-yielding currencies stabilised following the sharp reaction to China's rate move.

It dipped 0.6 percent .DXY> after climbing more than 1.6 percent on Tuesday.

"The dollar's move down through September went too far and was overdone. This bounce we saw is part of a healthy correction," said Jane Foley, senior currency strategist at Rabobank.

The U.S. currency is often seen as a safe haven and gains when appetite for riskier assets or growth-linked currencies suffers.

Britain's pound was also in focus after the BoE minutes and as the government prepared to give details of a programme of huge budget cuts.

Data also showed UK public borrowing rose to a record high for September last month. [ID:nUKLKLE665]

Sterling briefly fell to around $1.5685 after the releases, from around $1.5740 beforehand. It later traded at $1.5726.

(Additional reporting by Anirban Mag; Editing by John Stonestreet)