* Euro falls on lacklustre German PMI data
* Worries about Cyprus mute demand for euros
* Investors focus on Kuroda news conference
By Nia Williams
LONDON, March 21 The euro fell against the dollar on Thursday, after weaker-than-expected German business activity data fanned concerns about the health of the euro zone's largest economy.
Worries about a banking collapse in Cyprus also loomed over investors and dampened demand for the euro after the country rejected the terms of a European Union bailout earlier this week.
The euro dropped 0.3 percent on the day to $1.28895, nearing the four-month low of $1.28435 hit on Tuesday.
Germany's private sector slowed down in March, with manufacturing activity dropping below the 50 level that separates expansion from contraction.
But some strategists said the euro's losses may be limited by the lack of appetite among investors to buy other major currencies, given expectations of further monetary easing by the U.S. Federal Reserve and Bank of Japan.
"There's no clear bullish story out there to jump on to buy against the euro. But if the bad news flow continues and we get no resolution in Cyprus the preference would be to sell any rallies rather than buy the dips," said Daragh Maher, currency strategist at HSBC.
Maher said the 200-day moving average around $1.28775 would be a popular support level and sellers were likely to emerge around $1.30.
The most immediate fears of financial meltdown in Cyprus have eased for now, but the small island state is still scrambling to secure financial aid. It extended a bank lockdown to next week to prevent a run on banks and has turned to Russia for a lifeline.
Investors will keep a close watch on yields at a Spanish bond auction later in the session for any sign that contagion from Cyprus is spreading to the euro zone's heavily indebted fourth-largest economy.
The euro's losses on weak German economic data helped push the dollar index up 0.3 percent to 83.010, closer to a seven-month high of 83.166 hit last week.
This was despite the U.S. Federal Reserve on Wednesday pressing forward with its aggressive policy stimulus.
The Fed will continue to buy $85 billion in mortgage and Treasury bonds per month and Fed Chairman Ben Bernanke said the central bank would only slow the pace of its bond buying after the labour market shows sustained improvement.
FOCUS ON KURODA
Market players were also awaiting a news conference from new Bank of Japan governor Haruhiko Kuroda and deputy governors Kikuo Iwata and Hiroshi Nakaso for clues on how aggressively the central bank will ease policy under its new leadership.
The euro fell 0.6 percent against the Japanese currency to 123.33 yen, while the dollar also dipped 0.3 percent to 95.73 yen.
The yen strengthened as some investors speculated the market could be disappointed by Kuroda's news conference, given how far expectations of aggressive monetary easing have come.
"I'm sceptical that anything new can come of it. He (Kuroda) is part of a board, and it's going to be a little difficult for him to go up there before the board has met, and promise to do anything," said Rob Ryan, strategist for RBS in Singapore.
Still, if Kuroda calls an early policy board meeting ahead of the BOJ's next scheduled meeting on April 3-4, the yen could come under pressure as market players would take such a move as a powerful signal of intent from the central bank, Ryan said.
Market expectations for aggressive monetary easing by the BOJ have been running high, helping lift the dollar to a peak of 96.71 yen last week, the greenback's strongest level versus the Japanese currency since August 2009.