* Hungary cenbank seen hiking by 100 bps

* China stocks fall as rising COVID cases spur more curbs

By Susan Mathew

Aug 30 (Reuters) - Emerging market stocks recovered on Tuesday from their worst one-day drop in seven weeks, while currencies pulled up from near two-year lows, as the dollar paused after a rally driven by higher U.S. interest rate expectations.

South Africa's rand ZAR= rose 0.5% as did the Mexico's peso MXN= , while the Indonesia rupiah IDRUSD=R and the Indian rupee INRUSD=R led gains in Asia.

A stronger euro, aided by rising expectations of a 75 basis points hike by the European Central Bank at its next meeting, did little to curb central and eastern European currencies, with Hungary's forint EURHUF= up 0.5% ahead of a likely 100 basis points hike in there key interest rate to 11.75% by the central bank later in the day.

"Risky assets in Europe are benefiting from a strong commitment from European Union officials to prevent a full-scale energy crisis," said Piotr Matys, senior FX analyst at InTouch Capital Markets.

Czech Industry Minister Jozef Sikela said concrete proposals for an EU price cap on gas-for-power will be drafted this week and discussed with the European Commission and member states to reach some agreement by the Sept. 9 meeting.

MSCI's index of emerging market currencies .MIEM00000CUS rose 0.3% after marking its worst session in 11 weeks on Monday thanks to dollar strength following U.S. Federal Reserve Chair Jerome Powell's speech at the Jackson Hole symposium.

But as euro strengthened, the greenback lost its shine.

"European stocks and EURUSD are higher on the day which provides other risky assets with support as well."

China's COVID concerns capped gains, with the yuan CNY= staying close to two-year lows and stocks losing between 0.3% and 0.4%, as more cities imposed stricter curbs to control the number of infections.

Meanwhile, a report showed the Biden administration plans to ask the U.S. Congress to approve an estimated $1.1 billion arms sale to Taiwan, a move that could further fray Sino-U.S ties as China considers Taiwan its own.

"Geopolitical tension may increase further if the U.S. provides Taiwan with more weapons. However, the main driving factor for the markets is the pace of tightening by the Fed," Matys said.

MSCI's emerging markets index .MSCIEF rose 0.5%, attempting to make back some of Monday's 1.5% slide.

Indian stocks .NSEI .BSESN jumped 2%, while main indexes in South Africa .JTOPI , Poland .WIG and Hungary .BUX gained between 0.2% and 0.6%.

Meanwhile, Pakistan's government bond prices jumped on Tuesday after the International Monetary Fund approved the release of over $1.1 bln of funding for the cash-strapped country. US695847AB92=TE US695847AR45=TE

In Russia, Moscow Exchange, the country's largest bourse, said it expected to start issuing in September "replacement bonds" for unserviceable Eurobonds.

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Reporting by Susan Mathew in Bengaluru; editing by Carmel Crimmins