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SYDNEY, Sept 17 (Reuters) - The Australian dollar recovered from recent lows against the yen and U.S. dollar on Wednesday on investor relief after the U.S. government bailed out the beleaguered American Insurance Group (AIG).

But fresh worries stemming from rumours that more U.S. financial institutions could be in trouble kept investors cautious.

"The Aussie is grinding a bit higher, given that this move by the Fed is a positive one and has provided investors some relief," said Richard Grace, senior currency strategist at Commonwealth Bank.

"But fresh risk aversion, rumours about an investment bank merging, are all bearing down on appetite for riskier assets."

The yen trimmed losses after CNBC reported that Morgan Stanley officials were weighing whether the firm should remain independent or merge, given the recent turbulence in the company's stock.

Earlier, the U.S. government agreed to lend $85 billion to prevent AIG from collapsing, soothing edgy investors digesting the bankruptcy of investment bank Lehman Brothers <LEH.N> earlier this week. For more see.

The collapse of Lehman and the takeover of Merrill Lynch <MER.N> by Bank of America sent shockwaves across the globe, forcing investors to shed risky investments, and rush to the relative safety of government bonds and low-yielding currencies like the yen.

By 4:20 p.m., the Aussie inched up to $0.8005 from an intra-day low of $0.7910, and off 13-month lows of $0.7852 struck in the previous day.

The Aussie climbed to 84.74 yen from 82.48 yen late here on Tuesday, off a 2- year low of 81.39 yen reached in the previous session.

"The recent decline of the Aussie can be seen as a signal of extreme de-leveraging across markets and a much darker outlook for global growth," said Tony Morriss, senior strategist at ANZ.

"There will be little interest in holding the Aussie in this environment."

Global developments overshadowed Reserve Bank of Australia (RBA) Governor Glenn Steven's assertion that domestic banks were in far better shape and the economy would to ride out the current shock relatively better than other developed economies (see).

The RBA pumped A$4.285 billion ($3.4 billion) in cash into the banking system, nearly twice the estimated need, to soothe some of the strains caused by a spike in global inter-bank lending rates.

The global credit crunch had driven up domestic mortgage rates to decade highs, causing consumers to cut back sharply on borrowing and spending. That prompted the RBA to ease some of the tight conditions by cutting rates earlier this month.

Australian bond futures were lower as safe-haven inflows took a breather. They also tailed U.S. Treasuries which slumped after the U.S. Federal Reserve left interest rates unchanged, contrary to market expectations of a rate cut.

Three-year bond futures were down 0.140 points at 94.66, while the 10-year bond contract lost 0.125 points to 94.465.

-----------------(Snapshot at 4:20 p.m./0620 GMT)-------------

FUTURES CASH YIELD

90-DAY BILL<YBAc1> (DEC) 93.180(-0.180) 7.26 (7.26)

3-YR BOND (DEC) 94.660(-0.140) 5.43 (5.43)

10-YR BOND (DEC) 94.465(-0.125) 5.58 (5.58)

AUD/USD 0.8005 (0.7903) US 10-YR 3.51 (3.51)

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AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD

USD +360 (+368) +207 (+210) *FUTURES +0.195 (+0.235)

CAD +287 (+294) +210 (+211) *AUD 2-YR/10-YR SPREAD

NZD -20 (-33) -21 ( -25) *CASH +07 ( +09)

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(Reporting by Anirban Nag; Editing by Jonathan Standing)

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