METALS-Copper rises to near two-week high on weaker dollar

* Stock markets cautious, dollar index falls

* China refined copper output extends fall from record in Feb

* Miner Antofagasta boosts dividend payout as profits rise

(Updates with official ring prices)

LONDON, March 12 (Reuters) - Copper rose to a near two-week high on Tuesday as the dollar slipped, with hopes gathering pace that recent price falls could encourage physical buying from Chinese consumers.

Demand from China, which consumes 40 percent of global refined copper, has been slow to pick up since the end of the Lunar New Year holiday last month, pressuring prices.

A narrowing price gap between domestic Chinese prices and global benchmarks encouraged Chinese traders to buy in recent days, traders said. The differential between Shanghai and London prices, taking into account import duties, has narrowed to 85 yuan ($13.67) from around 1,200 yuan in December.

But analysts reckon that more evidence of a fundamental improvement in demand from China will need to emerge before copper can make significant gains.

"To sustain a macro-driven rally you need to see an actual improvement on the physical side, which we haven't seen yet ... we need to see premiums inching higher," said Andrey Kryuchenkov, an analyst at VTB Capital.

Three-month copper on the London Metal Exchange traded at $7,840 a tonne in official rings, up from $7,755 on Monday, having earlier hit its highest since Feb 28 at $7,883.

Copper prices dipped to $7,667 a tonne in intraday trade on Monday, their second lowest this year. Prices have shed almost 7 percent from the year's highs hit in early February to log losses of 2 percent for the year.

"A lot of people were predicting a breakdown of prices due to heavy fund selling and that didn't materialize so what we've seen is a lot of short covering," a London-based trader said.

European shares were flat on the day, though Antofagasta rose nearly 5 percent after the miner more than doubled its dividend payout.

The dollar index, measured against a basket of currencies, was down 0.12 percent, reversing earlier gains. A weak dollar makes commodities priced in the U.S. unit cheaper for holders of other currencies.

Looser monetary policy has yet to translate into commodities demand in China, in part due to uncertainties over its leadership transition and the spending power of local government, said Henry Liu, head of commodity research at Mirae Asset Securities in Hong Kong.

"We just need a little bit more patience. The downside is limited, but the upside could be slow and unspectacular," said Liu, who sees copper prices trading in the range of $8,300 to $8,500 in the second quarter.

CHINA COPPER OUTPUT DROPS

The latest figures showing lower copper output by China will help ease worries that the world's largest consumer and producer will import less refined copper for much of this year.

Chinese copper output dropped for a second straight month in February from record highs touched in December as smelter operations slowed for the Lunar New Year break.

Aluminium output, a market in which China is also the top consumer and producer, rose 15 percent to 3.51 million tonnes in the first two months. January output reached a record 1.78 million tonnes, the data showed.

In industry news, copper miner Antofagasta sought to brush off investor worries about its growth options with a better-than-expected 2012 payout and special dividend, as profits rose despite lower copper prices.

In other metals traded, soldering metal tin traded at $23,815 a tonne in official rings, from a close of $23,700 a tonne on Monday, while zinc , used in galvanizing, was at $1,997 from $1,960.50.

Aluminium traded at $1,977 a tonne from $1,951.50 on Monday, while stainless-steel ingredient nickel traded at $17,035 a tonne from $16,875 on Monday.

"The nickel price remains under pressure from severe over-supply as LME stocks continue to rise steadily," Macquarie said in a note.

Latest figures showed nickel stocks on LME-registered warehouses fell by 144 tonnes to 161,316 tonnes, but remained close to three-year highs.

Nickel had risen nearly 1 percent in the previous session after French metals group Eramet shut down a nickel mine in New Caledonia as a cyclone approached. The mine restarted early on Tuesday.

Battery material lead, untraded in official rings, was bid at $2,233 from Monday's close of $2,196.

(Addition reporting by Melanie Burton in Singapore; Editing by Alison Birrane)