GLOBAL MARKETS-U.S. stocks, dollar sluggish, all eyes on Fed meet this week

(Updates with mid-afternoon trading)

* European shares fall, Asian stocks at 2021 lows

* Bitcoin jumps on short-covering, Amazon speculation

* Govt bond yields post sizable drop

* Graphic: Global asset performance http://tmsnrt.rs/2yaDPgn

* Graphic: World FX rates http://tmsnrt.rs/2egbfVh

By Koh Gui Qing

NEW YORK, July 26 (Reuters) - U.S. stocks touched record highs in choppy trade on Monday and the dollar weakened, as investors avoided making new and bold bets before this week's Federal Reserve policy meeting that might offer clues on the outlook for monetary policy.

The performance in U.S. shares contrasted with sharp losses in Asia overnight, when MSCI's broadest index of Asia-Pacific shares outside Japan fell 2.1% to its lowest since December, hurt by concerns over tighter regulations in China.

In the United States, investors will closely parse comments by Federal Reserve Chair Jerome Powell on Wednesday after a two-day policy meeting for clues on how the central bank will start tapering its asset purchases, its assessment of inflation risks, and the future of interest rates.

"Powell will likely highlight that the recovery is on track but COVID remains a key downside risk," analysts at Bank of America said, adding that details about the Fed's tapering of asset purchases would probably be revealed in future meetings.

By afternoon, U.S. shares were still vacillating between modest gains and losses. The Dow Jones Industrial Average rose 56.2 points, or 0.16%, to 35,117.74. The S&P 500 gained 4.6 points, or 0.1%, to 4,416.38 and the Nasdaq Composite dropped 13.5 points, or 0.09%, to 14,823.54.

In a sign that risk appetite remained firm on Wall Street, bitcoin, the world's biggest cryptocurrency and sometimes an indicator of the demand for risk, soared 12% to $39,671.41, while ether jumped 7.8% to $2,365.24.

Speculation that online retailing giant Amazon might accept bitcoin as payment sparked the latest rally, and short sellers covering their positions added to the surge.

On the other hand, the U.S. dollar, which usually benefits when investors are seeking safety, softened as investors turned their attention to the Fed meeting.

The dollar index fell 0.301% to 92.612, but not far from a 3-1/2-month high of 93.194 struck last week. A softer dollar bolstered the euro, which gained 0.28% to $1.1804.

The dollar has gained nearly 4% from a low on May 25 as an improving U.S. economy bolstered the outlook for the Fed to start paring asset purchases as early as this year.

Indeed, investors have been pulling money out of Asian and emerging market stocks and U.S. shares instead, attracted by forecast-beating earnings and a recovery in the U.S. economy.

Bond markets have remained remarkably untroubled by the prospect of eventual tapering. Yields on U.S. 10-year notes have fallen for four weeks in a row - they slipped to a low of 1.221% on Monday before edging back up to 1.272%.

But the drop in Treasury yields has done little to undermine the dollar, in part because European yields have fallen even further amid expectations of continued massive bond-buying by the European Central Bank.

Gold prices also weakened as investors turned cautious ahead of the Fed policy meeting. Spot gold dropped 0.3% to $1,796.82 an ounce, while U.S. gold futures gained 0.05% to $1,798.70 an ounce.

Oil prices reversed earlier losses, buoyed by views that a tight supply for the rest of the year will support prices.

U.S. crude recently fell 0.01% to $72.06 per barrel while Brent was at $74.50, up 0.54% on the day.

(Additional reporting by Wayne Cole in Sydney and Dhara Ranasinghe in London; Editing by Nick Macfie, Alex Richardson and Dan Grebler)