* Dollar index up half a percent more in Europe

* Fed officials keep rate hike talk alive

* Japan investors sold net Y3.1 trln foreign bonds last week

* Sterling one-month volatility jumps as election nears (Recasts, updates prices)

By John Geddie and Patrick Graham

LONDON, April 9 (Reuters) – The dollar was on course for a third day of gains on Thursday, after confidence in its year-long rally wavered in the face of disappointing data over the past month.

On sterling, the cost of insuring against volatility over the next month, which now takes in the results of a May 7 parliamentary election, soared to the highest in more than three years.

Prospects for the dollar looked shaky after a weak batch of jobs data on Friday, but two US Federal Reserve figures said on Wednesday interest rates could still rise in June in the world’s largest economy.

Minutes from the Fed’s latest policy meeting, also released late on Wednesday, showed some officials are eager start raising rates. And analysts saw no sign of growing concern at the Fed over the dollar’s rise, another factor in the more mixed performance for the currency in the past month.

“I think a lot of the move around last weekend was driven by positioning. You can see that the market still has its core view that the dollar is heading higher,” BNP Paribas (LSE: 0HB5.L – news) strategist Michael Sneyd said.

The prospect of a rise in U.S. rates, even if it does not come until next year, still contrasts with Europe and Japan, where some believe quantitative easing has years to run. Stronger European data in the past fortnight gave the euro some support but has not changed that view, which underlies the rise of more than 20 percent in the dollar’s value since the middle of last year.

The dollar index rose 0.4 percent to a one-week high of 98.189 in early European trade, before slipping to 98.183. Against the euro, it rose 0.1 percent to $ 1.0771, a trend helped by the widening gulf between U.S. Treasury yields and record-low German yields.

It was down a fraction against the yen at 119.98 yen. But the outlook for the yen remains weak, as Japanese investors continue to seek overseas investments.

Weekly capital flows data on Thursday showed that Japanese investors bought a net 424.4 billion yen in foreign equities last week, their 20th straight week of such net purchases. But they sold a net 3.1 trillion yen in foreign bonds, their biggest weekly net sales based on data going back to 2005.

The net selling of foreign bonds may have occurred as the end of Japan’s fiscal year approached at the end of March, to book profits in existing positions, said Callum Henderson, Standard Chartered (HKSE: 2888.HK – news) ‘s global head of FX research.

“On the face of it a modest positive for the yen, but we need to see whether or not this continues in the month of April … Typically April sees new foreign investments,” he said. (Editing by Larry King)