* Spreads between U.S. and EU bond yields narrow

* Traders await ECB minutes during European session

* U.S. nonfarm payrolls next key test for dollar (Adds details, fresh quote, updates prices)

By Anirban Nag

LONDON, April 2 (Reuters) – The dollar fell on Thursday, hurt by fresh signs that the U.S. economy slowed significantly in the first quarter, which could delay the Federal Reserve’s decision to begin raising interest rates.

Benchmark treasury yields dropped and spreads between their European counterparts narrowed , with greater downside risks to Friday’s key U.S. employment report expected after a weaker-than-forecast private sector jobs report on Wednesday. That should keep the greenback on the defensive, traders said.

The dollar index was down 0.3 percent at 97.866 and trading weaker against the yen at 119.55 yen, while the euro rose 0.6 percent to trade at $ 1.0825.

Traders will scrutinise the minutes of the European Central Bank’s meeting in March, which come out at 1130 GMT and could lead to some swings in the single currency.

“The ECB minutes are likely to show policymakers’ diverse views about quantitative easing and that could help the euro,” said Yujiro Goto, currency strategist at Nomura.

“The weak U.S. data is weighing on the dollar and ahead of the non-farm payrolls number we expect it to trade with a weaker bias against the euro.”

Despite opposition from Germany — the euro zone’s biggest economy — the ECB unleashed a 1 trillion euro asset purchase programme in March to boost inflation and growth in the euro zone.

In recent weeks, data from the euro zone has beaten expectations and on Wednesday a survey showed that manufacturing activity in the region accelerated in March, with Markit’s purchasing managers’ index (PMI) rising to 52.2 from 51.1 in February.

In the United States, the ISM manufacturing index declined to 51.5 from 52.9 in February.

Also on Wednesday, data showed U.S. private employers added the lowest number of workers in more than a year in March and factory activity hit a near two-year low, highlighting the impact of a harsh winter, weaker global demand and a strong dollar.

“The lower ADP reading brought the dollar’s comeback to a halt and it isn’t surprising to see the currency underperform today as long dollar positions are being trimmed ahead of tomorrow’s non-farm payrolls release and the (Easter) holidays,” said Susanne Galler, currency strategist at Jefferies.

Markets in most of Europe will remain shut on Friday and Monday for Easter holidays. In the United States, though, the Bureau of Labor Statistics will release the jobs data on Friday.

Analysts polled by Reuters expect the non-farm payrolls report to show a rise of 245,000 jobs in March, following a gain of 290,000 in February.

“Even if Friday’s non-farm payroll number is decent — it could come in around 250,000 — that might not dispel strong dollar concerns. That is why there isn’t much bargain hunting for the dollar,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

(Additional reporting by Shinichi Saoshiro; Editing by Susan Fenton)