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GLOBAL MARKETS-Moody's China downgrade rattles Asian stocks, Aussie dollar

* Shanghai shares dip, though off lows, while Aussie skids

* Investors weigh Trump's budget proposal

* Fed minutes awaited for monetary policy clues

TOKYO, May 24 (Reuters) - Chinese stocks fell and the Australian dollar skidded on Wednesday after Moody's downgraded its sovereign credit rating on China, adding to worries about the global impact of slowing growth and rising debt in Asia's economic powerhouse.

Shares elsewhere in Asia also slipped, with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.3 percent, despite modest gains on Wall Street overnight.

Japan's Nikkei stock index pared its earlier gains but was still 0.5 percent higher.

"At the end of the day, overseas investors had been taking a cautious stance toward China, even before this, so it was not entirely surprising to the street," said Kyoya Okazawa, head of global markets, Japan at BNP Paribas Securities in Tokyo.

The move would likely have only a short-term market impact, he said.

The Australian dollar, regarded as a proxy for China due to the country's status as a major trading partner, fell as low as $0.7443 soon after the Moody's announcement.

The offshore yuan slipped, but later recouped its losses. The Shanghai stock index also was off earlier lows but was still down 0.4 percent.

Moody's cut China's rating by one notch to A1 from Aa3, saying it expects the financial strength of the world's second-biggest economy will erode in coming years as growth slows and debt continues to rise.

China's massive debt has been at the centre of concerns among economists and Beijing is walking a fine line as it tries to contain financial risks.

Moody's has no specific timetable for re-visiting China's rating but will monitor conditions on a regular basis, Marie Diron, associate managing director of Moody's Sovereign Risk Group, told Reuters. She said the risks to China's financial system were "broadly balanced."

China's finance ministry said the downgrade by Moody's was based on inappropriate methodology, saying it was exaggerating difficulties facing the economy and underestimating reform efforts.

The downgrade would probably not have a much broader spillover impact on global financial markets, said Suan Teck Kin, economist for United Overseas Bank in Singapore, noting that Moody's economic growth estimate seemed "too pessimistic".

Chinese authorities have stepped up regulatory curbs in recent months to defuse financial risks and have cracked down on risky lending practises, with the central bank moving toward tighter policy. But the steps have been largely cautious to avoid braking economic growth too sharply.

The U.S. dollar pulled away from recent 6-1/2 month lows as investors pored over President Donald Trump's first full budget plan.

Containing no surprises, the plan called for an increase in military and infrastructure spending but also cuts to social spending in areas such as healthcare and food assistance.

U.S. Treasury Secretary Steven Mnuchin said he hoped to get tax reform passed this year, though this would not happen by August.

"Of course we're not really sure of the details of the budget plan, and what form it will finally take, but it has given the market the perception that everything is moving forward again, after recent distractions such as 'Russia-gate'," said Mitsuo Imaizumi, Tokyo-based chief foreign-exchange strategist for Daiwa Securities.

Political turmoil following Trump's recent firing of FBI Director James Comey, who was overseeing an investigation into possible links between the president's election campaign team and Russia, had raised fears that his administration's promised tax reform and fiscal stimulus would be derailed.

Investors also were awaiting the minutes of the U.S. Federal Reserve's latest policy meeting, scheduled to be released at 1800 GMT on Wednesday.

"Expectations that the Fed will hike next month are also supporting the dollar. Though a hike is not a done deal, it is still widely expected," Imaizumi said.

The dollar index, which tracks the greenback against a basket of six major rivals, edged up 0.1 percent on the day to 97.395, pulling away from its lowest levels since November plumbed earlier this week.

The dollar added 0.1 percent against the yen to 111.88 , while the euro was steady on the day at $1.1181.

Oil prices modestly extended gains after rising in the previous session on expectations of an extension to OPEC-led supply cuts.

U.S. crude was up 0.1 percent on the day at $51.52 per barrel, while Brent crude futures were up slightly at $54.16.

Spot gold added 0.1 percent to $1,251.71 an ounce.

(Reporting by Tokyo markets team; Editing by Shri Navaratnam, Eric Meijer and Kim Coghill)