* Dollar undermined by cautious tone in Fed minutes
* Aussie recovers from 6-year year lows after upbeat jobs data
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, July 9 (Reuters) - The yen surrendered some of its gains on Thursday as a smidgen of stability returned to recently volatile Chinese stock markets, and investors locked in gains after the Japanese currency's biggest one-day rally against the greenback this year.
The dollar was up 0.4 percent at 121.21 yen JPY= , after tumbling 1.5 percent on Wednesday to suffer its biggest drop since December. It fell as far as 120.410 yen as investors unwound short positions amid a slump in global equities triggered by panic selling in Chinese stocks.
China's stock markets .CSI300 .SSEC have plunged roughly 30 percent over the last three weeks. But the sharp selloff abated on Thursday, as investors took heart that measures taken by Beijing may have stemmed the savage correction.
Chinese police visited the office of the country's securities regulator on Thursday to investigate suspected "malicious" short-selling of shares, state news agency Xinhua said, the latest effort by authorities to prevent a further meltdown in the stock market. ID:nL3N0ZP1MX
"The yen's downside is probably limited, because nobody knows what will happen in China, and Japanese stocks are still fragile," said Kaneo Ogino, director at Global-info Co in Tokyo, a foreign exchange research firm.
Japan's Nikkei stock index .N225 dived as much as 3.2 percent to three-month lows on Thursday on fears about the state of the Chinese economy, but then pared losses as mainland stocks stabilized.
Data released early in the session was yen-positive, suggesting the Bank of Japan might have less reason to expand its ultra-loose monetary policy. Core machinery orders rose to a 7-year high in May, up for the third-straight month. ID:nL3N0ZN20G
Japanese Prime Minister Shinzo Abe, speaking at a seminar, also said excessive yen strength has been corrected due to economic policies he put in place when he took office in late 2012. ID:nT9N0Z2077
The euro was up 0.5 percent at 134.30 yen EURJPY=R , recovering from a six-week low of 133.315 yen touched on Wednesday.
The euro was steady on the day at $1.1079 EUR= , well off a one-month trough of $1.0916 plumbed on Tuesday.
This week's volatility in Chinese equities managed to distract many Asian market participants from developments in Greece in recent days.
Athens has formally applied for a three-year loan and European authorities launched an accelerated review of the request. ID:nL8N0ZO1MI
The greenback also came under some pressure overnight after U.S. yields eased following the release of minutes of the Federal Reserve's June meeting. ID:nL1N0ZO1RO
As a result, the dollar index .DXY dipped as low as 96.123, and was down about 0.1 percent in Asia at 96.208, recoiling from Tuesday's one-month high of 97.235.
San Francisco Fed President John Williams said he still believed the Fed will start to hike this year but added he was "wary of acting before gathering more evidence that inflation's trajectory is on the desired path." ID:nL1N0ZO252
Greg Moore, senior currency strategist at RBC Capital Markets, said the minutes were taken as sounding slightly more cautious with 'many participants' concerned about the potential spillover from the Greek situation.
"Keep in mind these minutes reflect the committee's view of a few weeks ago and the Greece situation has only worsened since then," he said.
"On top of that, external spillover risks from elsewhere -China - have crept up in a significant way as well since then."
The Australian dollar popped back above 74 U.S. cents AUD=D4 , turning around from a six-year trough of $0.7372 and was last up 0.4 percent on the day at $0.7459.
Often used as a liquid proxy for China plays, the Aussie was hit hard on Wednesday by the rout in Chinese stocks.
Also helping lift the Aussie on Thursday, data showed Australian employment defied expectations and rose for a second month in June, suggesting labour market conditions were improving. ID:nL3N0ZO06Y
Against the yen, the Aussie recovered to 90.40 AUDJPY=R after touching a 17-month low of 89.14 earlier in the session.
(Editing by Simon Cameron-Moore)