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

* Traders to eye ECB minutes during European session

* U.S. nonfarm payrolls next key test for dollar (Adds details and quotes)

By Anirban Nag

LONDON, April 2 (Reuters) – The dollar fell on Thursday, nursing losses amid 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 0.45 percent at 97.743, trading weaker against the yen at 119.49 yen while the euro rose 0.6 percent to trade at $ 1.0831.

Traders will be scrutinising the minutes of the European Central Bank’s meeting in March, due later on Thursday, which could lead to some swings in the single currency during the European session.

“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 March.

Also on Wednesday, data showed U.S. private employers added the smallest 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.

“Right now the market’s worry is the Fed showing concern about a strong dollar, and the data only compounded such fears,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

“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,” he said.

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.

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