SHANGHAI, June 21 (Reuters) - The yuan CNY=CFXS soared to a five-year high on Monday as the Chinese central bank stepped aside and tolerated broad gains on the first trading day after its ditched the currency's two-year peg to the dollar.

The central bank appeared to be allowing the market find its feet by not intervening and letting the yuan post its biggest daily gains against the dollar since its revaluation in July 2005, staying true to its pledge on the weekend that it would allow greater currency flexibility.

At the high of the day of 6.7969, spot yuan was up 0.43 percent from Friday's close of 6.8262.Traders said it was unlikely the yuan would repeat such gains in coming days, and that Tuesday's mid-point setting would be an important barometer of how much more appreciation the People's Bank of China (PBOC) is willing to stomach.

The central bank on Sunday ruled out a one-off revaluation and said there was no basis for any big appreciation, adding that it would keep the exchange rate at a basically stable level.

It appears the PBOC won't act to intervene in trading to curb the yuan's rise today, as even a maximum 0.5 percent rise would still be tolerable, said a dealer at a European Bank in Shanghai.

If it wants, it can make its intentions clearly felt with tomorrow's mid-point, which will tell the market how much it will allow the yuan to rise in one day.

By late afternoon, the yuan was trading near 6.815.A mid-point near the average of Monday's spot trades would suggest the PBOC will tolerate more yuan strength in the days heading into a Group of 20 meeting later in the week.

Earlier, the mid-point CNY=SAEC was set at the same level as Friday -- 6.8275 -- disappointing some offshore players hoping for a clear sign of appreciation. But as the PBOC pulled back from its often heavy daily interventions, foreign and Chinese banks drove the yuan sharply higher.

The yuan will likely pull back later in the session because banks that shorted dollars will have cover those positions before the end of the day due to Chinese foreign exchange rules, analysts said. Banks are banned from holding short dollar positions overnight.

The yuan is allowed to trade 0.5 percent up or down versus the dollar relative to the mid-point and rarely moves much within that tight trading band.NDFs JUMP, THEN STEADY

Foreign hedge funds and other players did not drive down dollar/yuan offshore forwards sharply as the Chinese currency strengthened, having already started building up hefty positions betting on greater appreciation.

The spot yuan's previous post-revaluation high was 6.8099, set in September 2008.The rush into non-deliverable forwards CNYNFDOR= caused a sharp downward shift in the curve, though the initial move was kept in check by the PBOC keeping the mid-point unchanged.

Some traders said the steady mid-point was a deliberate effort by Chinese authorities to fend off speculators betting on yuan appreciation.

Even with the depegging of the yuan from the dollar, most traders are maintaining forecasts for the yuan to rise a maximum 3 percent in 6 months and 5-6 percent in a year.

Near-term three-month dollar-yuan non-deliverable forwards CNY3MNDFOR= were quoted at a two-year low of 6.7200 in early trade against Friday's close of 6.7810, implying yuan appreciation of 1.6 percent over that time versus from 0.7 percent on Friday. Three-month NDFs later pulled back to 6.7380.

One-year NDFs CNYNDF1YOR= were at 6.6210, implying 3.1 percent appreciation compared with 1.8 percent on Friday. The market had expected the PBOC to allow the mid-point to rise 5 to 10 pips after the PBOC's statement over the weekend, so the fixing showed hat the PBOC wanted to dampen speculation.

But the central bank could use major Chinese state-owned banks trading on its behalf in the spot market to guide the yuan up or down, regardless of the mid-point, dealers said.

It appears the central bank will adopt a new strategy, using the market to guide the yuan up or down, said a senior dealer at a Chinese state-owned bank in Beijing.

That will look more market-oriented, he said. The mid-point will remain a choice but it will be used for a stronger central bank signal for where it hopes the yuan will go.

(Editing by Eric Burroughs)