GLOBAL MARKETS-Risk appetite flickers as ECB bets hold down euro

* Europe shares edge higher after gains in Japan, China

* Wall St slightly higher to flat at reopen after Labor Day

break

* Dollar/yen hits seven-month high, euro at new one-year low

* U.S. ISM manufacturing eyed for more dollar cues

* Russia sanctions tensions bubble

By Marc Jones

LONDON, Sept 2 (Reuters) - Risk appetite flickered back to

life in financial markets on Tuesday with the dollar and

European and Japanese shares rising while safe-haven bonds, the

yen and gold all took a step back.

The dollar rose to its highest since January against the yen

and the euro slipped to a one-year low after another drop in

euro zone producer prices heightened speculation about what the

ECB will do when it meets on Thursday.

U.S. stock indexes were marginally higher or steady as

markets reopened after the long Labor Day weekend, with

investors awaiting a flurry of manufacturing data.

Investors in Asia had been subdued, having been robbed of

their usual U.S. lead-in overnight, but the mood in Europe had

seemed brighter until fresh talk of sanctions on Russia and more

soft producer prices data triggered a pullback.

As U.S. trading neared, European stocks

were left battling to stay in the black, with only the

Dax in Germany holding onto any real gains.

Ukraine said 15 of its soldiers had been killed in the past

24 hours in fighting with pro-Russian separatists backed by

Russian troops, while Europe's next foreign policy chief said

the bloc's leaders would decide on a package of new sanctions

against Russia by Friday.

"We need to respond in the strongest possible way," Italy's

Frederica Mogherini told reporters following a presentation to

EU lawmakers in the European Parliament.

Russian shares and the rouble were broadly

stable, though, after three days of falls. For those watching

the developments closely, however, the lull was likely to prove

temporary ahead of crisis talks at a NATO meeting in Wales at

the end of the week.

"It is never a straight line, so it is a bit of a breather

and a pause (in Ukraine-Russia tensions), but I continue to be

concerned by this situation," said Benoit Anne, an emerging

markets strategist at Societe Generale (Paris: FR0000130809 - news) .

"And we all wait for the ECB, of course, this week. That is

a major consideration and that will probably send a bullish

signal to risky assets."

Bond markets have been one of the big beneficiaries of

expectations the ECB will loosen policy to revive the euro

zone's flagging economy, and traders cashed in some of those

gains before Thursday's meeting even as the euro

continued to edge south.

Comments by ECB President Mario Draghi late last month led

to bets the central bank is preparing to pump more liquidity

into the system, possibly via purchases of government or

corporate bonds, a measure known as quantitative easing (QE), to

boost the faltering euro zone economy and stave off the risk of

deflation.

Sources from within the ECB told Reuters last week that new

action at its meeting this Thursday was unlikely but not

impossible, and the barrier to QE was still "very high".

Euro zone producer prices fell again last month, by 1.1

percent from a year ago, due to lower energy prices, data showed

on Tuesday. It was the steepest annual drop since April, and the

report caused the euro to tumble as low $1.3109, after

starting the session around $1.3123.

IHS Global Insight economist Howard Archer said the price

data was "more worrying news on the inflation front for the

ECB," although core inflation, which strips out volatile

elements like energy, has not dropped since November.

JAPAN REFORMS

In Asian trading, Chinese stocks gained for a third day and

Tokyo's Nikkei rose 1.2 percent, its biggest jump in

almost a month. A planned cabinet reshuffle by Japanese Prime

Minister Shinzo Abe helped to fuel reform hopes.

The dollar was boosted by the flagging euro and by gains in

Tokyo shares that reduced demand for the safe-haven yen. The

U.S. currency rose to a seven-month high of 104.87 yen

and reached a 14-month high on the heavily traded index

of currencies.

"This (the euro's trough) is not just about the ECB. Part of

this is a dollar story - the dollar has outperformed a whole

bunch (of developed world currencies)," said Jane Foley, a

senior currency strategist at Rabobank in London.

Foley added that increased momentum around the idea that the

ECB would loosen policy, and that the Bank of Japan would

introduce another round of QE, was driving the dollar's gains,

with a perception that it was "the best of the bunch".

Later on Tuesday, an Institute of Supply Management report

on the U.S. manufacturing sector could provide further evidence

of economic improvement and highlight the diverging paths

between the U.S. and euro zone economies. The U.S.

Federal Reserve looks ready to phase out quantitative easing

just as the ECB may consider introducing it.

Elsewhere, the Australian dollar showed little reaction to

the Reserve Bank of Australia's widely expected decision to keep

its cash rate at a record low 2.5 percent for the 12th

consecutive meeting. The Aussie was down 0.5 percent at $0.9283

as it brushed a one-week low.

In commodities, Brent crude fell below $102 a barrel,

pressured by worries about slowing oil demand growth in China

and Europe, a strong U.S. dollar and ample supplies.

Palladium cut back from the 13 1/2-year high of $910 an

ounce it reached overnight on fears that Western sanctions will

curtail supply from Russia, the world's biggest producer of the

metal. Spot palladium last traded at $885 an ounce. Gold (Other OTC: GDCWF - news)

also nudged down as risk appetite recovered.

(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by

Larry King and Susan Fenton)