CORRECTED-FOREX-China's yuan weakens but falling yen points to risk recovery

(Corrects headline and paragraph 1 show yen down not up)

* Offshore yuan at seven-week low, euro dragged downwards

* But drop in safe-haven yen signals ebbing virus fears

* Sterling tumbles after UK PM takes tough line in EU talks

* Graphic: World FX rates in 2019

LONDON, Feb 3 (Reuters) - China’s offshore yuan dropped to a more than seven-week low on Monday, but a drop in the safe-haven Japanese yen suggested fears surrounding the spread of coronavirus in China were ebbing for now.

Chinese markets took a beating in the first trading session after an extended Lunar New Year break. The offshore yuan dropped as low as 7.023 yuan per dollar. The dollar was last up 0.3% against the Chinese currency.

Yet the slide in Chinese assets was mostly a product of selling pressure that had built up over the holiday and not a reflection of new market fears, analysts said.

In an effort to head off any panic, the Chinese government took a range of steps to shore up its economy, including cutting its key interest rate.

European stocks rose and the yen fell 0.3% to 108.67 per dollar, off a three-week high of 108.305 set on Friday.

The Swiss franc, also considered a safe haven, was mixed, falling against the dollar but rising slightly versus the euro.

“Chinese markets are just catching up with the risk off moves in the past week,” said Adam Cole, chief currency strategist at RBC Capital Markets.

“The fact that we haven’t had any more bad news over the weekend means that there is a bit of a sigh of a relief, so dollar/yen and risk markets are faring better.”

The dollar rallied more than 1% against the onshore yuan from levels before the holiday to 7.0268.

The weaker yuan also dragged the euro lower, noted Kit Juckes at Societe Generale, because the Chinese currency has the biggest weight in the basket that determines the value of the European Central Bank’s trade weighted euro index.

The euro weakened 0.3% to $1.1062.

The dollar was up against a basket of rivals, with the dollar index up 0.3% to 97.685.

The Australian dollar fetched $0.66945, up 0.1% on the day but holding near a 10-1/2-year low of $0.6670 touched last October.

The currency is often regarded as a proxy for the yuan, being more freely traded and because of Australia’s reliance on trade with China.

Sterling tumbled after Britain laid out a tough opening stance for future talks with the European Union following its departure from the bloc last week.

Prime Minister Boris Johnson’s government signalled over the weekend that Britain would set its own agenda rather than meeting the bloc’s rules, reviving fears of a hard Brexit at the end of an 11-month transition period.

“Brexiteer politicians are moving from celebrating the exit to sounding bold as the trade talk verbal jousts begin. The FX market is likely to be nervous and with positioning data still suggesting an excessively long speculative position in the market, sterling is vulnerable,” Juckes at Societe Generale said.

Sterling fell as low as $1.3055, down 1.2% and undoing all of its gains following the Bank of England’s decision last week to keep interest rates on hold. Against the euro the pound slid to as low as 83.95 pence. (Additional reporting by Tommy Reggiori Wilkes Editing by Giles Elgood)