By Naomi Tajitsu LONDON (Reuters) - The dollar slipped on Friday, relinquishing early gains as a recovery in stock markets from dramatic losses this week prompted traders to scale back some flight-to-quality buying in the U.S. currency. Currencies were little changed as traders took a breather at the end of a highly volatile week that many in the market said marked a shift in focus from the global financial crisis to the impact that bank bailouts would have on the real economy. European shares rose 4 percent in early trade, bouncing back after dropping 5 percent on Thursday, but struggling banks, fears of a recession and falling oil prices kept a lid on risk appetite after stocks plunged to a five-year low last week. Analysts said that while these concerns will continue to keep shares on the back foot, a simmering down in markets following a week of erratic moves was helping to boost currencies like the euro and sterling against the dollar. "We saw a sharp decline in stocks this week ... but there was some stabilization in Asia, and if that trickles through in Europe, we could see a rebound in the euro," said Ian Stannard, senior foreign exchange strategist at BNP Paribas. The euro was largely flat at $1.3473 by 3:46 a.m. EDT, recovering from a slide to $1.3426 earlier in the day. The single European currency was boosted by a 4.1 percent climb in regional shares, but the euro hovered near a 1 1/2-year low hit last week. The dollar slipped 0.5 percent to 101.01 yen, and edged down slightly against a basket of currencies to 82.250. Concerns about the banking system were beginning to give way to fears of a global recession, which was underlined by grim readings on Thursday of U.S. industrial output factor activity, while inflation risks taper off. LENDING THAW Market participants said that a gradual thaw in frozen interbank lending was suggesting that government plans to rescue banks around the world could help salvage the banking system, which was likely to bring some stability to markets in the near- to mid-term. "The fixings on Libor rates continue to edge down, bringing the prospect of some rejuvenated interbank lending that little bit closer, even if it is still some way distant," analysts at Calyon said in a research note on Friday. They added that investors are hopeful of tangible progress of plans from the governments of the UK, the United States, France, Germany and a host of other countries to recapitalize their banks using taxpayer funds. Yet markets are impatient for tangible signs of bank stability as a recession looms, and Calyon added that more U.S. economic data was likely to keep sentiment gloomy on Friday. Figures on U.S. housing starts are due later in the day, as is a reading of consumer sentiment, and weak readings would bolster the argument that the U.S. economy is sinking into a recession -- if it hasn't already. (Reporting by Naomi Tajitsu; Editing by Victoria Main)

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