* Euro bounces vs dollar but hovers close to 1-month lows
* Concerns over euro zone periphery remain
* Swiss franc rallies broadly on safe-haven demand (Adds quote, updates prices)
By Wanfeng Zhou
NEW YORK, Aug 16 (Reuters) - The U.S. dollar fell against major currencies on Monday as early negative sentiment stemming from weak Japanese growth data dissipated and traders decided the currency's rally last week was too fast.
U.S. stocks recovered from an early decline on global economic worries sparked by the disappointing Japanese data. That saw the greenback give up some of last week's gains when risk aversion had pushed it up more than 3 percent against a basket of currencies.
Currency investors shrugged off U.S. manufacturing and housing data that pointed to weakness in the economy, though sentiment remained cautious overall with the safe-haven yen and the Swiss franc posting broad gains.
"We saw risk aversion abating. Despite some weaker data out of the U.S. including the NAHB (housing) index coming in weaker than expected, the market preferred to ignore that," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
But he said the continued strength of the safe-haven yen, with dollar/yen trading below 85.50, suggests the markets are still wary of taking on risk and are looking for direction.
The ICE Futures U.S. dollar index, which tracks the greenback versus a basket of currencies, was last down 0.6 percent to 82.477. The index gained 3.13 percent last week, the biggest weekly rise in nearly two years.
"The dollar strength at the end of last week was probably somewhat overextended and the market is giving back some of that," said Dean Popplewell, chief strategist at FX brokerage OANDA in Toronto.
The euro recovered against the dollar after falling almost 4 percent last week, its largest weekly drop since the week of May 9. It was last at $1.2815, up 0.5 percent, recovering from one-month lows hit in Asian trade.
Analysts said the euro remains vulnerable to concerns about the health of the continent's banking sector and sovereign debt situation in peripheral economies.
The premium investors demand to hold 10-year Irish and Greek government bonds rather than German Bunds widened, while the cost of insuring their debt against default increased.
Traders said the next downside target for euro/dollar is $1.2600, the 50 percent retracement level of the euro's June to August rally and a band of minor support is around 1.2730-40, the lows from July and August.
SWISS RALLY
The dollar fell 1 percent to 85.32 yen with investors like hedge funds still preferring to go short on the greenback.
The Swiss franc rallied, with the U.S. dollar down 1.1 percent at 1.0395. The euro fell 0.6 percent to 1.3325 francs, having earlier dropped to its lowest since July 8. Traders said funds were lightening positions in euro/Swiss franc with sparse liquidity exacerbating the fall.
"While EUR/USD remains largely around the 1.28 handle it is EUR/CHF which continues to be the main avenue through which concerns over euro zone peripherals is being felt in the FX markets," Divyang Shah, strategist at IFR Markets, wrote to clients. IFR is part of the Thomson Reuters group.
The Swiss franc and the yen, both used to fund leveraged carry trades, typically gain in times of market stress.
The yen's gains came despite weaker-than-expected Japanese gross domestic product numbers. Anemic growth and a rising currency pose a headache for Japanese policy makers.
Investors are wary of a possible meeting between Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa later this week to discuss the yen's strength. (Additional reporting by Nick Olivari and Vivianne Rodrigues; Editing by Leslie Adler)