* Yen slips to 7-month low against buoyant dollar
* Dollar index extends gains, approaches one-year peak
* Euro zone inflation data key this week
By Anirban Nag
LONDON, Aug 25 (Reuters) - The euro fell to its lowest in nearly a year against the dollar on Monday, hurt by weak German data and after comments from the head of the European Central Bank raised expectations of quantitative easing.
Germany's Ifo business climate index, based on a monthly survey of some 7,000 companies, fell to 106.3 from 108, undershooting the Reuters consensus forecast of 107, as a conflict between Russia and Ukraine took its toll on Europe's biggest economy.
The data added to expectations that the ECB may have to ease policy sooner rather than later and drove down yields on most euro zone government bonds to record lows.
The euro skidded to $1.3184 after the IFO survey was released, its lowest since September 2013. It was last trading at $1.3198, down about 0.3 percent on the day, amid lower than usual volumes due to a holiday in London.
The euro's woes lifted the dollar index 0.2 percent to 82.488, heading towards its Sept. 5 peak of 82.671. A break above that would take it to levels not seen since July 2013.
In stronger language than he has used in the past, ECB President Mario Draghi said on Friday the central bank was prepared to respond with all its "available" tools should inflation drop further.
The ECB holds its next policy review on Sept 4.
"The FX market has interpreted Draghi's statement as meaning that broad-based asset purchases, or quantitative easing, has now become more likely," said Lutz Karpowitz, currency strategist at Commerzbank.
"Euro has already slipped below the $1.32 level."
Investors will scan euro zone inflation data due on Friday. Analysts polled by Reuters expect annual inflation to have slowed to 0.3 percent in August from 0.4 percent in July. That is well below the ECB's danger zone of 1.0 percent and its target of just under 2.0 percent.
Citi said it was recommending investors to sell the euro with a target of $1.3075.
"As Sept 4 approaches, we expect the market to turn greater attention onto the euro and ECB," Citi analysts said in a note.
"Dovish comments on inflation from Draghi should only further centre market focus on the euro. From a macro and event risk perspective, the fundamentals surrounding European growth and inflation have continued to deteriorate."
In contrast to ECB's Draghi, Federal Reserve Chair Janet Yellen on Friday gave a nod to the concerns of some Fed officials about the sustained level of monetary policy stimulus, even as she stressed the need to move cautiously on raising rates.
As a result, Fed funds futures fell back <0#FF:> as the market priced in the risk of an earlier move on rates. Yields on two-year Treasury paper climbed over 8 basis points for the week, the largest such rise since June last year.
That helped the dollar outperform, rising to a seven-month high against the yen at 104.49 on Monday morning before pulling back to stand at 104 yen, still up slightly.
Even before its latest jump, the dollar had increasingly attracted bulls. Speculators boosted bullish bets on the greenback in the latest week to their highest in more than two years, according to data from the Commodity Futures Trading Commission released on Friday.
U.S. flash PMI for August along with new home sales data for July are due later in the day. Housing data has been improving of late, having been a concern for the Fed for most of last year and a better-than-expected reading is likely to help the dollar. (Editing by Toby Chopra)