* Euro up but ECB rate cut expectations may check gains * Dollar gains after U.S. jobless claims data * Sterling jumps to two-month high vs dollar after UK GDP data * Data from Japan show investors remained net sellers of foreign bonds By Julie Haviv NEW YORK, April 25 The dollar dropped against the euro and yen on Thursday as a recent slew of mostly soft data raised concerns about the pace of economic recovery in the United States, although many analysts contend the dollar remains appealing. Orders for durable goods marked their biggest drop in seven months in March, and, despite a fall in the latest weekly jobless claims, the U.S. labor market is still sluggish and retail sales have been weak, which could keep the Federal Reserve's ultra-loose policy well in place. The Federal Reserve will likely discuss the string of weak data at its policy meeting next week. Should the U.S. central bank acknowledge renewed weakness in the economy, analysts will expect the Fed to maintain its easy money policy for some time. Any sign that the Fed plans to taper off its asset purchase program should buoy the dollar, however. The Fed's bond buying, called quantitative easing, has long been negative for the dollar as it is tantamount to printing money. With the state of the labor market is a key factor for Fed policy, the dollar pared losses against the euro and yen after data showed the number of Americans filing new claims for unemployment benefits fell last week. The data offered reassurance that the bottom is not falling out of the labor market despite signs of slower growth. "Investors have recently grown skittish about the U.S. economy losing steam following a run of soft data on the consumer and manufacturing," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington D.C. "All eyes now look ahead to Friday's first-quarter growth figures," he said. Gross domestic product data on Friday is expected to show the U.S. economy grew at a 3.0 percent annual pace in the first quarter, accelerating from a 0.4 percent rate in the previous period, though economists predict that has slowed to around 1.5 percent in the current quarter. The euro last traded at $1.3038, up 0.2 percent on the day and moving away from a low of $1.2954 struck a day earlier after a German survey of business morale came in weaker than expected. The euro also found support from signs that two months of political gridlock in Italy may be coming to an end. While the euro gained against the dollar, it could run out of steam amid strong expectations of an interest rate cut by the European Central Bank next week. Senior sources involved in the deliberations say momentum is building for action to help a recession-hit euro zone economy. "We are dollar positive, but we recognise it will not be a straight line," said Neil Mellor, currency strategist at Bank of New York Mellon. "We are seeing some softness in the dollar and the data, and given what the Fed is saying, we expect it to stay as a funding currency." STERLING RALLIES In contrast to U.S. data, a better-than-expected performance by the British economy saw the pound jump more than 1 percent to a two-month high against the dollar. Sterling also hit a three-week peak versus the euro. The UK avoided recession in the first quarter, wrong-footing some bearish investors, including longer-term ones, who had expected a weak number that would push sterling lower. The data watered down expectations that the Bank of England will add to its asset-buying program to underpin the economy. Sterling rose 1.3 percent to $1.5458, its strongest since Feb. 19, and more than a cent above where it was trading before the British GDP data was released. The euro fell 1.1 percent to 0.8432 pence. While worries about the British economy have eased somewhat, persistent concerns over a sustained U.S. recovery have thwarted the dollar's rise past 100 yen - last seen in April 2009 - with options barriers also standing in the way. Data on Thursday from Japan's Ministry of Finance on weekly capital flows showed that Japanese investors remained net sellers of foreign bonds, unloading a net 862.6 billion yen in the week to April 20. Investors have been closely watching flows data in recent weeks for any indication that the Bank of Japan's massive stimulus has pushed Japanese investors to seek higher returns overseas. Major Japanese life insurers have expressed caution about shifting funds into foreign bonds. But over a period of time, investment from large Japanese investors is likely to pick up and some of that could spill over into Europe and that could usher more yen weakness.