FOREX-U.S. dollar, yen gain as risk sentiment worsens

* Yen, dollar extend gains as weak PMIs knock share markets

* High-yielders sink on expectations of global rate cuts

* BoE, ECB, RBA, RBNZ all seen slashing borrowing costs (Updates prices, adds comments, changes byline, dateline; previous LONDON)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 1 (Reuters) - The U.S. dollar and yen gained on Monday as sharp declines in Chinese and European manufacturing activity unnerved investors and pushed stock markets worldwide lower.

The currencies have rallied over the last few months as investors reversed risky trades funded by cheap yen and dollar borrowings. Investors have also sought dollars as they pinned their hopes on a substantial economic stimulus package from the incoming Obama administration.

The yen performed best against currencies of countries where central banks are expected to slash interest rates later this week, including the euro, sterling and Australian dollar.

"This is a classic flight-to-safety reaction fueled by further signs of a deteriorating global economy," said Omer Esiner, senior market analyst, at Ruesch International in Washington.

"Specifically, the dramatic slowdown in European, UK, and Chinese manufacturing have pressured stock markets around the world, including U.S. stock futures. These are all supportive of safe-haven bids in the dollar and the unwinding of carry trades, which has helped the yen," he added.  Continued...