Australian and NZ dollars sag as China data disappoints

* Aussie dips below 88 U.S. cents after soft Chinese data

* China flash PMI falls to 49.6, lowest in six months

* Kiwi also off on the day, supported by rate outlook

By Gyles Beckford and Ian Chua

SYDNEY/WELLINGTON, Jan 23 (Reuters) - The Australian and New Zealand dollars came under pressure on Thursday after a disappointing report on China's manufacturing sector renewed worries about the health of the world's second-iggest economy.

The Aussie slid to a session low of $0.8792 AUD=D4 , from around $0.8838, nearing a 3-1/2-year low of $0.8756 set early in the week.

The flash Markit/HSBC Purchasing Managers' Index (PMI) for China fell to 49.6 in January, from December's 50.5, suggesting a mild slowdown at the end of 2013 has continued into the new year. News Search ID:nB9N0K201P

China is Australia's single biggest export market and slower growth there could be a drag on the local economy.

Just a day earlier, the Aussie had its sights set on 89 U.S. cents after an unexpectedly sharp rise in inflation at home forced investors to cover bearish positions. It was last at $0.8802.

"It highlights Australia is still very sensitive to developments in China, probably more so than it is to domestic economic news," said Greg Gibbs, senior strategist at RBS in Singapore.

"There is some support technically here, but you do get a sense the Aussie is very much in a downtrend and the risks are that we do go ahead and break new lows at some stage."

The Aussie also lost ground against the yen, falling 0.5 percent on the day to 92.04 AUDJPY=R . The euro rose 0.5 percent to A$1.5385 EURAUD=R .

Tracking the Aussie, the kiwi NZD=D4 slipped 0.3 percent to $0.8281, pulling further away from this year's peak of $0.8433 set last week.

Still, the kiwi remained well supported as markets wagered on a possible hike in interest rates as early as next week.

A flurry of New Zealand data on Thursday reflected the generally positive outlook for the year, notably a survey of consumers showed confidence at a seven-year high and inflation expectations easing. News Search ID:nW9N0IO00A

Other data showed a slight dip in the number of job advertisements, and a marginal easing in manufacturing activity.

News Search ID:nW9N0IO008 News Search ID:nW9N0IO009

"It is all part of the improving macroeconomic picture as such things as construction sector activity picks up, higher agricultural revenue enters the country, and net migration swings firmly positive adding more juice to domestic demand," said Bank of New Zealand economist Doug Steel.

The Reserve Bank of New Zealand has its first policy review on Jan. 30. Debt futures imply a near 50-50 chance of a 25 basis point rise, although many analysts are still leaning towards a March start to the tightening cycle. CSSY Href="NewsSearch">NZ/POLL

New Zealand government bonds 0#NZTSY= were little changed. Australian bond futures were likewise becalmed with the three-year contract YTTc1 up a tick at 96.980, while the 10-year contract was flat at 95.870.

(Editing by Jacqueline Wong)

((ian.chua@thomsonreuters.com)(+61 2 9373 1871)(RM: ian.chua.thomsonreuters.com@reuters.net))

Keywords: MARKETS AUSTRALIA/FOREX