* Euro zone PMI data comes below forecasts
* China February HSBC flash PMI hits seven-month low
* Yen broadly higher as safe-havens sought
By Anirban Nag
LONDON, Feb 20 (Reuters) - The euro fell for a second straight day against the dollar on Thursday, pulling away from 7-week highs, after euro zone business surveys pointed to a sluggish recovery and underlined a fragile outlook for the currency bloc.
Markit's Composite Purchasing Managers' Index, which is based on surveys of thousands of companies, dipped to 52.7, just below January's 31-month high of 52.9. It missed forecasts for a rise to 53.1 and implied that growth in the region will be, at best, tardy.
The euro fell to a session low of $1.3685, pulling away further from a 7-week high of $1.37735 struck on Wednesday, and down 0.3 percent on the day. The euro's weakness was broadbased, losing ground against the British pound, the Swiss franc and the Japanese yen.
Adding to the euro's problems was a much softer-than-expected reading of French inflation, which kept alive risks of deflation in the euro zone.
"European data has smartly capped the euro rally, with weak French inflation data and a very ugly dip to nine-month lows in the French flash February Services PMI weighing," said John Hardy, head of FX strategy at Saxo Bank.
"Then a weak German flash manufacturing PMI poured additional pressure on the euro, even if the services survey was strong."
The French Purchasing Managers' Index (PMI) data came in well below forecasts while German figures released after that did little to counter worries that the euro zone economy will need more stimulus from the European Central Bank.
Highlighting some of the choppiness that the euro could face in the near term, one-month euro/dollar implied volatility - a gauge of how sharp swings will be - edged up to 6.4 percent, climbing from a six-year low struck earlier this week.
SAFE-HAVEN YEN SOUGHT
The euro's drop helped the dollar recover against a basket of currencies. The index was trading 0.2 percent higher on the day at 80.314, although the greenback underperformed the Japanese yen.
The yen was helped by another batch of weaker numbers from China which added to concerns around emerging markets and pushed investors to the safe-haven yen.
The dollar fell 0.35 percent against the Japanese currency to trade at 101.96 yen, while the euro fell 0.6 percent to trade at 139.60 yen.
The yen's rise comes despite a sharp deterioration in Japan's trade balance, which analysts say will start to hurt the Japanese currency in the long run. In the near term though, bouts of risk aversion were likely to underpin it.
"We have weak data from China and that is playing into a weaker dollar," Peter Kinsella, strategist with Commerzbank in London.
The other big loser was the Australian dollar, hurt by an HSBC survey that showed activity in China's factories shrank again in February as employment fell at the fastest pace in five years.
The Aussie closely tracks the economic fortunes of China, Australia's biggest trading partner, and it shed 0.2 percent to $0.8985.
- Europe News