* Dollar hits multi-month lows vs euro, stg, commodity FX
* China PMI data adds to optimism on the global economy
* General Motors (GM.N: Quote, Profile, Research, Stock Buzz) to file for bankruptcy
* Risk appetite, share gains push dlr index to year low
(Adds quotes, updates prices)
By Jessica Mortimer
LONDON, June 1 (Reuters) - The dollar fell sharply on Monday, tumbling to its lowest so far this year against a basket of currencies and the euro as optimism that the global economy is on the road to recovery continued to boost riskier assets.
The commodity-related and higher risk Australian and New Zealand dollars performed particularly well, hitting 8-month highs against their U.S counterpart as oil prices CLc1 jumped to a 7-month peak and European shares soared 2 percent .FTEU3.
News that China's manufacturing sector continued to expand modestly lent further credence to the notion that the global economy is on the mend and dented the U.S. currency.
The risk rally, which caused the dollar index to post its biggest monthly percentage fall since 1985 last month, was unhindered by news General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz) would file for Chapter 11 bankruptcy protection later on Monday.
Investors instead expressed relief a key uncertainty had been removed in the market, while stronger-than-expected purchasing managers' surveys on the euro zone and UK manufacturing sectors also boosted sentiment.
"The initial response to the GM story, the China PMI data and rallies in commodities and equities have all added to risk appetite and have contributed to the advance in the euro against the dollar," BNP Paribas chief currency strategist Hans Redeker said.
The next focus in terms of data will be the release of the latest U.S. ISM survey on manufacturing activity at 1400 GMT. ECONECONUS
At 0950 GMT, the dollar index .DXY fell 0.8 percent to 78.634 .DXY, having hit its lowest since mid-December at 78.586.
The euro gained 0.6 percent on the day to $1.4236 <EUR=>, just shy of an earlier year high of around $1.4245. The dollar also fell against the Japanese yen, losing 0.8 percent to 94.54 yen <JPY=>.
Among perceived higher risk currencies, sterling rose to its highest in seven months against the dollar of $1.6432 <GBP=D4>, while the Australian and New Zealand dollars hit eight-month highs of $0.8136 <AUD=D4> and $0.6511 <NZD=D4> respectively.
CHINA PMI BOOST
Adding to optimism that the global economy may be over the worst of the recession, data showed China's manufacturing sector continued to expand moderately.
Though the official purchasing managers' index dipped to 53.1 in May from 53.5 in April, this was the third month in a row that the reading has been above the 50 level that separates expansion from contraction. [ID:nPEK17043].
The final euro zone PMI manufacturing index beat expectations meanwhile, rising to a seven-month high of 40.7 in May, up from the provisional estimate of 40.5 [ID:nLAG003469]. The UK manufacturing PMI also showed the slowest contraction in the sector in a year [ID:nLAG003470].
Meanwhile, investors will be watching closely for further news on General Motors after U.S. officials said the auto giant will file for bankruptcy later Monday, the third largest in U.S. history [ID:nN01398575].
Analysts are beginning to question just how much further the across-the-board rally in riskier assets can run, however, given the sharp gains in recent weeks.
"Optimism is certainly gaining ground, but the question is whether this is just a bear market rally or whether it is something more sustained than that," SEB currency strategist Johan Javeus said.
"The PMIs have been improving but at some point the market will need to start seeing this improvement reflected in the hard economic data," he added.
(Editing by Ruth Pitchford)