GLOBAL MARKETS-Chinese data lifts shares, dollar stays weak

* China's factories expand at best pace in 7 months

* Data drives rebound in shares after sharp selloff

* Below-forecast euro zone PMI drags euro off 2-year high

* Expectations of unchanged Fed policy weigh on dollar, lift gold

By Richard Hubbard

LONDON, Oct (KOSDAQ: 039200.KQ - news) 24 (Reuters) - A pick-up in Chinese factory activity sparked a recovery in world shares on Thursday, though signs of sluggish growth in Europe capped gains and dragged the euro off a two-year peak against the dollar.

With expectations that the U.S. Federal Reserve will maintain its stimulus programme unchanged into next year still dominating markets, the fresh round of Purchasing Managers' Indexes reminded investors that the global economy is slowly gaining momentum.

"Essentially what the PMIs are saying is that there is a pretty modest recovery, but at least its going in the right direction," Chris Scicluna, head of Economic Research at Daiwa Capital Markets said.

Activity in China's vast factory sector reached a seven-month high this month, according to an HSBC (LSE: HSBA.L - news) survey, easing concerns about a slowdown in Chinese exports which would point to weakening global demand.

The data helped lift Europe's broad FTSEurofirst 300 index 0.3 percent by midday, supporting mining and industrial stocks with investors also seeking out auto companies which would benefit from a pick-up in Chinese demand.

U.S. shares were expected to open higher, though factory activity data for the world's biggest economy due later is likely to show a slight slowdown over a period when the government went into partial shutdown.

Overall, MSCI (NYSE: MSCI - news) 's world equity index added 0.1 percent, slightly retracing losses of 0.6 percent on Wednesday, when markets were rocked by fears that a spike in Chinese short-term rates could hurt growth.

DOLLAR DOLDRUMS

The dollar remained broadly weaker as U.S. Treasuries yields traded near their lowest levels in three months after this week's soft payrolls persuaded many investors the Fed will not pare its bond purchases until 2014.

Dollar selling briefly lifted the euro to $1.3824, its strongest since November 2011, though analysts said there was little conviction behind the move.

"The markets are geared up for euro strength at the moment but people are very reluctant to go headlong into the currency, especially at these levels," said Simon Smith, chief economist at FXPro.

The euro was last steady at $1.3772 while 10-year German bond yields were flat at 1.77 percent, showing little reaction to the PMI numbers.

Markit's PMI index for the 17-nation euro area showed business activity eased slightly in October after a pick-up in September, though it confirmed that region's economic recovery was taking root.

GROWTH VS FED

The positive economic news from massive consumer China and expectations of an extended flow of super-easy dollars generally supported commodity prices, though trading was cautious after sharp moves earlier this week.

Gold was the biggest mover, rising 0.4 percent to $1,336.50 an ounce, nearing a four-week high as the outlook for an unchanged Fed policy heightened concerns about inflation risk.

"Postponement of tapering means higher liquidity in the market, probably higher inflation risks in the longer term," Commerzbank (Xetra: CBK100 - news) analyst Eugen Weinberg said. "That's likely to lead to higher interest in gold."

Oil was steady after data showing a rise in U.S. crude stocks drove prices down heavily on Wednesday. Brent crude futures were up 22 cents at $108.20 a barrel, while U.S. crude gained 31 cents to $97.17.

Copper edged down to its lowest in more than a week as the concerns about the current tight credit conditions in China and its impact on demand offset the brighter growth outlook.