* Aussie slides after weak Caixin/Markit China PMI
* Euro hits 17-month high vs Aussie
* Unwinding of carry trades seen as supporting euro
* Dollar index at 8-week low as Fed rate hike hopes fade (Updates prices, adds comments)
By Masayuki Kitano
SINGAPORE, Aug 21 (Reuters) - The Australian dollar tumbled on Friday after a private survey showed that China's factory sector shrank at its fastest pace in 6-1/2 years, adding to worries that the world's second-largest economy may be slowing sharply.
The preliminary Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) stood at 47.1 in August, well below a Reuters poll median of 47.7 and the worst reading since March 2009.
The Australian dollar slid to $0.7285 at one point and was last trading at $0.7303, down 0.5 percent on the day. The Aussie, which is seen as a liquid proxy for China plays, is down about 1 percent so far this week.
The euro rose amid signs of a retreat from risky assets and scaled a 17-month peak against the Australian dollar.
The single currency rose to its highest level since March 2014 versus the Australian dollar at 1.5464.
Against the greenback, the euro rose 0.4 percent to $1.1286. The euro had risen as high as $1.1290 as of 0321 GMT, its highest level in about two months.
The euro is likely to stay firm if global equities weaken further, said Jesper Bargmann, head of trading for Nordea Bank in Singapore.
"The driver is the global stock markets. This is a sign of risk aversion and with the euro being one of the preferred funding currencies at the moment, people are paring back their short euro positions," Bargmann said.
Growing doubts as to whether the U.S. Federal Reserve will be able to raise interest rates next month as once expected, have weighed on the dollar and helped to support the euro.
Against a basket of major currencies, the dollar touched a near 8-week low of 95.436 .DXY . The dollar index last stood at 95.470.
Against the yen, the dollar fell to its lowest level in nearly six weeks at 122.81 yen JPY= . The greenback was last down 0.4 percent at 122.92 yen.
Traders are now quickly pricing out a September hike after minutes from the last Fed policy meeting provided no definitive indication.
They suspect the fall in commodity prices and many emerging economy assets and concerns about a slowdown in China are all making the Fed's plan to gradually raise rates more difficult.
"The market's focus is now shifting to emerging markets and the Chinese economy. I think the dollar is oversold in the near term. But if the Chinese data is weak, we could see more risk-off trades," said Kyosuke Suzuki, director of forex at Societe Generale (PARIS:SOGN).