SHANGHAI, June 21 (Reuters) - China's yuan CNY=CFXS soared on Monday to its highest against the dollar since the landmark 2005 revaluation, with the central bank stepping aside and tolerating broad gains on the first trading day since scrapping the currency's two-year peg to the dollar.

The central bank declined to intervene for the of the few times in the yuan's modern history and appeared to want the market to drive intraday trade, backing up its weekend pledge to allow greater flexibility.

Traders said it was unlikely the yuan would repeat gains on the same scale in coming days, with Tuesday's mid-point setting serving as an important barometer of how much more appreciation the People's Bank of China is willing to stomach.

You cannot expect the yuan to shoot up 5 percent in two or three weeks, as the pace of Monday's rise implies, said a dealer at a North American bank in Shanghai. Several dealers said they expected the PBOC to keep the mid-point unchanged on Tuesday, or even push it up as much as 50 pips, to effectively cap how much the yuan could rise.

The yuan is allowed to rise or fall 0.5 percent versus the dollar from the daily mid-point but rarely moved towards the extremes of that tight trading band. The yuan closed at 6.7976 against the dollar, up 0.42 percent from Friday's close and marking its biggest daily gain against the U.S. currency since the revaluation set the currency free to move in a managed floating exchange rate system.

The yuan climbed as far as 6.7958 in intraday trade,another post-revaluation record and gaining as much as 0.47 percent from the central bank's mid-point, nearly reaching the 0.5 percent daily trading band limit. Under intense pressure to act before the Group of 20 meeting in Canada later this week, China ditched the dollar peg -- an emergency measure used to shield the economy from the global financial crisis and resulting recession.

NO REVALUATION The central bank on Sunday ruled out a one-off revaluation similar to that of July 2005 and said there was no basis for any big appreciation, adding that it would keep the exchange rate at a basically stable level.

Before trade started on Monday, the PBOC set the yuan's daily mid-point CNY=SAEC at the same level as Friday - 6.8275 -- disappointing some offshore players who were 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, suggesting that he PBOC is allowing the currency become more market-driven during the day.

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, said a dealer at a European bank in Shanghai. A mid-point near the average of Monday's spot trades --estimated by traders at about 6.8100 against the dollar --would suggest the PBOC will tolerate more yuan strength heading into a Group of 20 meeting later in the week.

The rise in yuan implied volatility CNYVOL was limited, suggesting the market was not yet preparing for sharp gains or big daily swings like that seen on Monday.

NDFs JUMP, THEN STEADY Foreign hedge funds and other players drove down dollar/yuan non-deliverable forwards CNYNFDOR=, but not as sharply as might be expected given the big move in spot,traders said. In part that was because funds had already built up short positions before the surprise weekend announcement, and also because though the PBOC's decision to keep the mid-point unchanged sparked a round of short covering.

Some traders said the steady mid-point on Monday 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 to 6 percent in a year.

Near-term three-month dollar-yuan non-deliverable forwards CNY3MNDFOR= were quoted at 6.7350 in late trade, implying yuan appreciation of 1.4 percent over that period, but off a two-year low of 6.7200 hit in early trade against Friday's close of 6.7810.

One-year NDFs CNYNDF1YOR= were at 6.6350 bid in late afternoon, implying 2.9 percent appreciation in a year compared with 1.8 percent implied on Friday, as measured from the mid-point. They had initially fallen as low as 6.6210. (Editing by Eric Burroughs and Edmund Klamann)