SHANGHAI, June 24 (Reuters) - The yuan CNY=CFXS closed higher against the dollar on Thursday after moving in a wide range of more than 150 pips, as the central bank returned to a more laissez faire stance seen early in the week and let the market have a bigger say in traded values.

The People's Bank of China's tolerance for greater volatility helped to push more U.S. currency into the market and relieved a dollar shortfall at some banks and their clients, which had caused the yuan to weaken in morning trade.

But dealers said there was no sign that the PBOC was encouraging a sharp rise in the yuan, although political concerns intensified overnight when several U.S. lawmakers renewed calls for legislation to press China on yuan appreciation.

Before an announcement over the weekend that it would depeg the yuan from the the U.S. currency, the PBOC had intervened from time to time to keep yuan quotes near its preferred levels.

Dealers have long said that confining yuan movements within 50 pip ranges would completely wipe out any speculative trading in the market, given market players' costs. That would leave a very dull market with trading based only on real money demand.

(Volatility) is very positive for the market by encouraging activity, said a dealer at a major Chinese commercial bank in Shanghai. At this level of volatility, banks can do some proprietary trading with a bit of speculation aimed at profit.

The yuan closed at 6.7997 to the dollar, up from Wednesday's close of 6.8124 and Thursday's central bank mid-point of 6.8100, which was little changed from Wednesday's mid-point of 6.8102.

The yuan hit an intraday low of 6.8158 in the morning and a high of 6.7995 late in the session, still short of daily ranges of more than 300 pips seen early in the week but far exceeding moves of only a few pips per day during the two-year dollar peg.

POLITICAL RISKS

U.S. senators said on Wednesday they were unmoved by China's steps to partially free the yuan since the weekend and vowed to push forward legislation to punish a yuan misalignment they say distorts trade and steals U.S. jobs.

China announced over the weekend that it would allow the yuan's exchange rate to move more freely but it has made it clear that its currency reform would be gradual and controllable.

Since then, the yuan has risen 0.4 percent -- a sizeable move compared with the virtual standstill from July 2008 to last Friday but miniscule compared with the yuan appreciation of up to 20 or even 40 percent sought by some Western critics.

It is widely believed in the domestic market that China will not make any further concessions and that fresh pressure from U.S. lawmakers would very likely backfire.

Market and economic conditions have changed so much since the global financial crisis that it is unrealistic to think China still has firm plans to allow the yuan to appreciate to a certain degree in a certain period of time, said a senior trader at a major European bank in Shanghai.

The best China can do is to show that it is friendly, it is cooperative and it is willing to change in line with market and economic conditions.

The euro zone debt crisis has cast doubt on the pace of China's economic recovery, reminding Beijing how vulnerable the world's third-largest economy is to a global slowdown.

Chinese economists often argue that Western critics underestimate that vulnerability, especially given how far China's per capita income lags developed countries.

They say it may be inappropriate to apply Western standards to the currency of a country whose per capita GDP is only one-20th that of the United States.

Caution about Beijing's stance was reflected in the offshore forwards markets, where speculators were wary about shorting dollars on Thursday and suspected that Beijing's currency moves after the weekend were aimed primarily at appeasing critics before the G20 summit late this week.

Dollar/yuan non-deliverable forwards (NDFs) were steady late on Thursday, implying moderate yuan appreciation that dealers said was now settling at reasonable levels.

Benchmark one-year dollar/yuan NDFs CNY1YNDFOR= eased to 6.6650 bid from Wednesday's close of 6.6700, with implied yuan appreciation over that period rising to 2.18 percent from 2.10 percent the previous day.

Three-month NDFs were unchanged at 6.7720 bid, with implied yuan appreciation standing at 0.56 percent, as measured from the central bank's spot mid-point. (Editing by Edmund Klamann)

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