FOREX-Sterling posts sharp gains; dollar down against most currencies

*

Pound rallies after 1% fall as PM defends economic plan

*

BoE buys gilts for 2nd day

*

Euro up vs dollar; German inflation soars

*

Japan signals readiness to intervene in FX again

(Adds comment, byline, NEW YORK dateline, updates prices)

By Joice Alves and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK, Sept 29 (Reuters) - Sterling gained in volatile trading on Thursday, as the U.S. dollar fell against some currencies, with investors taking comfort from the Bank of England's purchase of long-dated bonds to stabilize the market.

The pound rose 1.4% to $1.1034. After hitting a fresh 37-year low of $1.0327 three days ago, sterling has rallied 6.4% against the dollar.

The recovery in the British currency was due in part to the BoE's action. On Thursday, the BoE bought 1.415 billion pounds ($1.55 billion) of British government bonds with maturities of more than 20 years, the second day of a multi-billion pound program designed to stabilize the market.

"Sterling is outperforming and this a follow-up from what we saw yesterday," said Brian Daingerfield, head of G10 FX strategy at NatWest Markets in Stamford, Connecticut.

"The Bank of England took a pretty decisive step to stabilize markets. And that is being taken positively by the currency market," he added.

Sterling initially fell on Thursday as Prime Minister Liz Truss defended her government tax-cutting budget.

The dollar, on the other hand, slipped against a basket of major currencies. It was last down 0.1% at 112.454.

The euro rose 0.4% against the dollar to $0.9767.

Data showed euro zone economic sentiment fell sharply and by more than expected in September as confidence dropped among companies and consumers, who are also downbeat about price trends in the coming months.

The big focus was German inflation, which jumped to 10.9% this month, far beyond expectations for a reading of 10%. That suggests the figure for the wider 19-country euro zone, due on Friday, is also likely to exceed the predicted 9.6%, reinforcing the case for another 75 basis points increase at the next European Central Bank policy meeting.

That said, some analysts think the ECB's potential action is likely just a short-term boost.

"Rate increases can support a currency... But the process of inflation is never good for a currency, especially if inflation hasn't been tamed properly by the central bank," said Stephen Gallo, European head of FX Strategy at BMO in London.

"I would not want to own the euro simply because the ECB is hiking. I would want to own the euro when the U.S. dollar peaks, and when it becomes clear that euro zone inflation is moderating and when it becomes clear that the bloc is clear of a massive recession," he added.

In other currency pairs, the dollar rose 0.3% to 144.525 yen .

Japan intervened last week to shore up a struggling yen. Finance Minister Shunichi Suzuki said on Thursday Japan's recent currency intervention was conducted to rectify market distortion caused by speculative currency moves. He signalled his readiness to intervene again if speculation persists.

Elsewhere, China's offshore yuan bounced about 0.5%to 7.1280 per dollar after Reuters reported state banks have been told to stock up for yuan intervention.

The risk-sensitive Australian dollar sank 0.6% to US$0.6483. A new measure of consumer prices showed annual inflation eased a bit from August to July, offering hope that cost pressures might be close to a peak.

(Reporting by Joice Alves in London and Gertrude Chavez-Dreyfuss in New Yor; Additional reporting by Kevin Buckland and Tom Westbrook; Editing by Angus MacSwan, Alex Richardson and Jonathan Oatis)