* HSBC flash PMI shows Chinese factory activity steadying
* Australian dollar edges higher, yen slips
* Yen off 3-1/2-month highs versus both dollar and euro (New throughout, changes to dateline to LONDON from previous SINGAPORE)
By Patrick Graham
LONDON, May 22 (Reuters) - Firmer data out of China dominated major currency markets on Thursday, provoking a recovery for the Australian dollar and eating into yen gains this week against the U.S. dollar.
China's factory sector, while still contracting slightly, turned in its best performance this year in May, holding out the hope of more revenues for an Australian economy which provides much of its raw materials as well as offering a filup to the broader global economic picture.
Peak to trough, the Aussie gained as much as 1 percent against the yen - seen as a safe haven for money in tougher economic times. The Japanese currency fell back around a third of a percent against the U.S. dollar.
"It's still only one number and in general the Chinese economy isn't really accelerating, but the data today has given the Aussie a bit of a boost," said Paul Robson, strategist with RBS in London.
The Aussie settled somewhat early in the European day to trade at $0.9260.
One faller this week has been the Swiss franc, with talk in the market swirling on Wednesday of a big order for dollars just as Credit Suisse announced it will pay $2.5 billion in penalties for helping Americans evade taxes.
The dollar traded just off three month highs of 0.89655 francs on Thursday.
"There was a big order that went through yesterday and just generally if you believe the dollar is going to gain then dollar/franc is a good way to go," said one London-based dealer.
European purchasing manager surveys were a slight positive for the euro, which has traded in very tight ranges this week.
The single currency's fall over the past fortnight has stalled, blocked on one side by the capital inflows which have benefited it this year and on the other by the threat of a cut in official interest rates next month.
The euro traded flat for the day at $1.3683.
The yen had hit 3-1/2-month highs against the dollar on Wednesday but the survey of Chinese factory activity added to resistance to further gains around 100.80 yen, pushing it down to 101.55 yen in early trade in Europe.
"The dollar has averted a drop to levels below 100 yen for now," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
Another factor in the yen's retreat was the recovery of U.S. 10-year Treasury yields, which rose to 2.557 percent , compared with a trough of 2.473 percent set last week which was the lowest since late October.
Speculation about the possibility of any imminent ramp-up in the Bank of Japan's monetary stimulus has receded, but there are also signs that Japanese investors are building up their investments in Japanese stocks and foreign bonds.
(Additional reporting by Masayuki Kitano in Singapore; Editing by Ruth Pitchford)