* Yen gains as European financials slide
* Chinese FX reserves decline, but less than feared
* Commodities currencies on firmer footing
* Dollar index trades higher
By Patrick Graham
LONDON, Feb 8 (Reuters) - The yen surged by half a percent against the dollar on Monday as worry over Europe's banks drove capital to the safety of the Japanese currency.
A recovery in oil prices early in European trade quickly gave way to another bout of the selling that has dominated the first month of 2016 on major stock and commodity markets.
The euro - until now also considered a safe haven for investors - fell almost 1 percent against the yen as European bank shares fell and the cost of insuring debt against default jumped. It fell 0.4 percent against the dollar, to $1.1121 EUR=EBS .
"The strong yen stands out," said Stephen Gallo, a strategist with BMO in London. "As long as we remain in such a risk-off environment, there's no point in trying to catch that falling knife."
A rise in oil prices during Asian trading had helped commodity-linked currencies like the Australian and Canadian dollars gain AUD= CAD= , but that advance faded as crude turned lower. LCOc1 O/R
Concern over economic growth drove the U.S. dollar to its worst performance in more than four years last week, until solid numbers on unemployment and wage growth helped it stabilise on Friday.
But with the market abandoning bets that U.S. interest rates would rise this year, the dollar remains under pressure. Even after Friday's gains, the U.S. currency lost 3.6 percent against the yen last week, its biggest weekly drop since July 2009.
"Ultimately, the dollar is still likely to trade on a weaker footing," said Lee Hardman, a currency economist with Bank of Tokyo-Mitsubishi-UFJ in London.
"We adjusted lower on the outlook for U.S. growth last week and obviously the data on Friday showed the labour market is improving. But we need to see evidence of that continuing."
Against a basket of currencies, the dollar inched up less than 0.2 percent to 97.215 .DXY It fell 0.5 percent to 116.23 yen. JPY=EBS
One big risk of the past month - China's problems with growth, debt and the threat of currency depreciation - may be on hold for the week-long Lunar New Year holiday.
Data over the weekend showed the decline of China's foreign exchange reserves slowed to just below $100 billion last month. That was less than expected, but analysts said the numbers were still a warning that Beijing must stem a flight of domestic capital or be forced to allow the yuan CNH= to weaken.
"My impression is that there is virtually no reserve armoury big enough to cope with widespread capital outflows, if capital is allowed to flow relatively freely," Societe Generale (PA:SOGN) strategist Kit Juckes said in a morning note.
"Which is just to say that even if the market does calm down over the festive period, this is a story which will return." (Editing by Larry King)