* Yuan up over 5 pct since depegging, 1.5 pct this year
* Crossing 6.5 likely to be flagged as evidence of flexibility
* Weak dollar means yuan still weaker on trade-weighted basis
SHANGHAI, April 29 (Reuters) - China's yuan breezed past 6.50 per dollar on Friday, surpassing the psychologically important level for the first time and raising expectations that Beijing will continue to let the currency strengthen more quickly as a way of battling inflation.
The People's Bank of China (PBOC) set the tone for the day by setting the yuan's mid-point at another fresh high, and traders seized on the signal, pushing the currency to as high as 6.4929 per dollar in early trade.
The yuan, also known as the renminbi, has now gained over 5 percent against dollar since it was unleashed from a de facto peg last June, and 1.5 percent so far this year.
While the 6.50 per dollar level is not significant from a technical standpoint, Chinese media and economists are likely to seize on it as evidence of how far the government has come in allowing it to appreciate since its landmark currency reforms in 2005. It has gained 27.5 percent since then.
"This is a signal they will continue appreciation. We can't see any signs they will actually speed up appreciation, but they are likely to keep to the pace that we're seeing now," said Liu Dongliang, analyst at China Merchants Bank in Shenzhen.
Beijing has made it increasingly clear that it is willing to use the currency as one way of fighting inflation, which is running at over 5 percent from a year earlier, partly as a way of blunting rising commodity prices.
Critics in the United States and elsewhere continue to press for Beijing to take more action to let the yuan strengthen, to alleviate what they view as an unfair advantage for Chinese exporters.
Indeed, the yuan's gains against the dollar are only part of the picture, because that has happened against the backdrop of the dollar falling to nearly three-year lows against a basket of currencies .
The yuan has accordingly been falling on a trade-weighted basis as well, meaning the rise Beijing has been engineering against the U.S. currency has in effect managed only to temper its fall on a broader basis.
Most onshore forex dealers still expect the yuan to rise by roughly 5-6 percent versus the dollar this year as a whole, as the central bank continues with its gradualist approach to flexibility.
Market rumours have surfaced recently that the PBOC could be planning more drastic moves, from a widening of the daily trading band to a one-off revaluation, but most forex dealers do not expect such moves anytime soon because faster appreciation can already be carried out under the current system. (Reporting by Emma Ashburn and Jason Subler; editing by Kazunori Takada)