FOREX -Dollar down on weak U.S. markets, Aussie sinks after low inflation

* Dollar down vs euro and yen, reflecting dip in U.S. stocks, yields

* Aussie falls on lower-than-expected CPI (Other OTC: CPICQ - news) data

* Limited reaction to China HSBC flash manufacturing PMI (Updates with late New York (Frankfurt: HX6.F - news) prices)

By Daniel Bases

NEW YORK, April 23 (Reuters) - The U.S. dollar weakened against the euro and yen on Wednesday, undermined by a decline in U.S. equity prices and Treasury yields and finding little support from a slower-than-expected expansion in the U.S. manufacturing sector.

"As (U.S.) equities underperform, this leads to buying of Treasuries and yields fall. The dollar is softer as a result because it is reflecting other markets rather than internal components," said Sebastian Galy, senior currency strategist at Societe Generale (Paris: FR0000130809 - news) in New York.

A smaller-than-expected increase in Australian first-quarter consumer inflation spurred Aussie dollar losses of more than 1 percent versus the greenback as the data diminished chances the Reserve Bank of Australia will raise interest rates this year.

The Australian dollar extended its losses in early U.S. trade to hit a low of $0.9268, pulling further away from a five-month high of $0.9461 set earlier in April. Late in New York it traded down 0.89 percent at $0.9282.

Australia's growth prospects, at the heart of the central bank's efforts to talk the currency down last year, have improved, while concerns over China have settled somewhat. That was underscored by a weak China PMI survey on Wednesday that was in line with forecasts.

The U.S. dollar's value against a basket of currencies fell 0.06 percent.

U.S. manufacturing activity expanded in April, but more slowly than expected. Sales of U.S. single-family homes in March were weaker than expected, falling to their lowest since July of last year. .

In Europe, April manufacturing activity increased more than expected to a near three-year high. The euro however remains hamstrung by consistently low inflation and investors are wary of the possibility of more monetary stimulus from the European Central Bank.

The euro held a 0.07 percent gain to $1.3815, and climbed 0.39 percent to 82.33 pence against the British pound . Sterling fell 0.26 percent to $1.6779.

Sterling fell after Bank of England meeting minutes highlighted a growing debate between policymakers about slack in the economy and the medium-term inflation outlook.

The dollar fell 0.19 percent to 102.41 yen, while the euro slipped 0.09 percent to 141.47 yen.

"We think the ECB believe that the current low inflation is temporary and that it will pick up along with growth," said Kenneth Dickson, investment director with Standard Life (LSE: SL.L - news) Investments in Edinburgh. "They do not believe that Europe is heading for the sort of deflationary cycle that Japan saw."

European Central Bank president, Mario Draghi, has made clear the euro's strength is a possible trigger for the bank to ease monetary policy. He is scheduled to give a speech in Amsterdam on Thursday. (Additional reporting by Patrick Graham in London, Masayuki Kitano in Singapore, Ian Chua in Sydney; Editing by Larry King, Meredith Mazzilli and Chizu Nomiyama)