FOREX-Dollar retreats from 7-yr high vs yen as Japan recession hits Nikkei

* Dollar/yen initially jumps to 7-yr high on weak Japan GDP

* But dollar eventually drops as Tokyo stocks slide

* Weaker-than-expected GDP spells recession for Japan (Updates details)

By Shinichi Saoshiro

TOKYO, Nov 17 (Reuters) - The dollar swung wildly against the yen on Monday, initially spiking to a seven-year high after data showed Japan's economy unexpectedly slipped into recession before pulling down as the grim economic news sent Tokyo stocks tumbling.

Data on Monday showed Japan's economy shrank an annualised 1.6 percent in July-September, confounding expectations for a modest rebound and solidifying the view premier Shinzo Abe will call a snap election and delay a second sales tax hike next year.

The dollar jumped to a new seven-year high of 117.06 yen in a knee-jerk reaction to the GDP numbers but pulled back to 115.50 yen, down 0.7 percent on the day, as Tokyo's Nikkei slid 2.6 percent.

"Dollar/yen has been moving recently in close relationship with (Japanese) equities so the Nikkei's fall knocked the pair from its highs," said Masafumi Yamamoto, a market strategist at Praevidential Strategy in Tokyo.

"The GDP data was so unexpectedly weak and clouded many prospects taken for a given," he said.

Many market participants, particularly foreign investors, sell the yen to hedge their equities positions, so the Japanese currency tends to gain whenever stocks drop.

The Nikkei had rallied to a seven-high peak last week, helped by speculation of the unpopular tax hike plans being delayed and that an Abe win at a snap election may result in a second round of reflationary policies.

Abe's Liberal Democratic Party (LDP) is expected to keep its majority in the lower house in the event of a snap election since the opposition is divided and weak. But LDP's support could be eroded by a weakening economy, clouding the political picture.

"In addition to the impact from the Nikkei's fall, the possibility of the ruling coalition losing some seats at the snap election and coming under fire from the opposition in the wake of the poor data is weighing on dollar/yen," said Shusuke Yamada, chief FX strategist at BOA Merrill Lynch in Tokyo.

"Dollar/yen's rise to the 116 and 117 levels was based on a comfortable LDP election win, so that scenario is coming under review," he said.

The euro rose 0.3 percent to $1.2556 as the dollar pulled back from its highs against the yen.

The euro had already posted modest gains against the dollar overnight as Treasury yields rose after a component of the Thomson Reuters/University of Michigan sentiment index showed a decline in Americans' expectations for long-term inflation.

The dollar index, gauge of the greenback's strength against a basket of key currencies, fell 0.3 percent to 87.304, peeling away from an intraday high of 87.626 hit early in the Asian session.

As the greenback slid broadly the Australian dollar gained 0.4 percent to $0.8779.

The Swiss franc traded near a 26-month high of 1.2011 against the euro, edging ever closer to the Swiss National Bank (NYSE: NBHC - news) 's three-year-old cap of 1.20 francs per euro. (Editing by Shri Navaratnam)