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FOREX-Dollar steadies after post-Fed slump

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

LONDON, July 27 (Reuters) - The dollar recovered against the euro in Europe on Thursday after sinking to a 2-1/2 year low following a Federal Reserve rate decision and statement provoked a bout of selling.

The Fed broadly stuck to its promises on policy but also noted weakness in U.S. inflation more explicitly than before, extending a sporadic slide for the dollar index that dates back to early March.

Against the euro, it has fallen 13 percent from a peak hit in January, and 5 percent in the past four weeks, stirring concerns over how much more euro strength European Central Bank policymakers will be willing to allow without reacting.

By 0703 GMT, the dollar was roughly steady on the day at $1.1728 per euro, having hit a low of $1.1777 in Asian trading.

"The euro's seven-month surge ... to the top of its three-year $1.0341-$1.1714 range has called into question our expectations for the pair to range-trade through year-end," Barclays said in a forecast update.

"We continue to believe that the conditions for a euro breakout are not yet met," the note said.

By contrast, the dollar was 0.2 percent lower against the basket of currencies used to measure its broader strength, and it fell 0.5 percent against the Australian dollar - one of a series of commodities-linked currencies to profit from this week's bounce in oil and metals prices.

The past month has been dominated by an increase in expectations for tighter monetary policy from a number of central banks - at a time when those for further rises in U.S. interest rates are flagging.

But after ECB chief Mario Draghi said last week policymakers were paying attention to the euro's rate, investors are wondering if more gains for the currency might not prompt a more aggressive response - and potentially slow its hand on any reduction in its massive programme of bond-buying.

"The euro becoming so strong at the moment is equivalent for Europe to a sort of tightening," Indosuez Wealth Management Chief Investment Officer Frederic Lamotte said.

"My worry is we will still continue in that direction and FX people are talking about $1.21. I don't think it would temper the positive mood (on markets) but we have to look at it."

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Additional reporting by Sujata Rao-Coverley; Editing by Louise Ireland)