* Yen selling eases a bit, but more downside seen
* Euro eyes Italian & Spanish govt bond auctions
* Sterling hit by woeful UK manufacturing data
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, March 13 (Reuters) - The yen's sell-off paused on Wednesday but expectations of radical policy easing from the Bank of Japan meant further weakness was likely, while dour UK manufacturing data consigned sterling to the dog house.
The dollar fell 0.2 percent in Asia to 95.85 yen, yielding to profit-taking after having scaled a 3-1/2-year peak of 96.71 yen on Tuesday, where it had brought its year-to-date gains to more than 10 percent.
"There's no change in the big downtrend in the yen. In the near term, the dollar/yen may fall further on profit-taking but I would say 94.50 is as low as it can go at most," said a trader at a European bank.
Minutes of the BOJ's February meeting showed on Tuesday policymakers were more open to adopting unorthodox policy options of the incoming governor than previously thought, suggesting the BOJ can push through aggressive stimulus easily.
"JPY should continue to remain under pressure on growing expectations of aggressive and potentially earlier easing coming through from the BOJ," said Kiran Kowshik, strategist at BNP Paribas.
While investors took a bit of profit in the embattled yen, they turned up the heat on sterling, which slumped to a fresh 33-month low of $1.4832 on Tuesday before slightly recovering to $1.4933, up 0.2 percent on the day.
Against the Australian dollar, the pound was near lows not seen since 1985. It last stood at A$1.4473.
Sterling's decline came after data showed British manufacturing output fell in January at the fastest pace since June, reinforcing fears the economy has tipped into its third recession since the 2008 financial crisis.
"Chancellor of the Exchequer George Osborne will present his budget next week and reports have emerged that the BOE's remit could be changed to allow additional QE despite high-running inflation," said Christopher Vecchio, analyst at DailyFX.
"Should this occur, the next leg lower in Gilt yields could be around the corner, which could put further downside pressure on sterling. We still find that GBP/USD should fall to $1.4200 by early-Q3."
Meanwhile, the euro stood at $1.3030, well within the $1.2955-3135 range seen so far this month. Traders said the market was waiting for the outcomes of government bond sales in Italy and Spain due this week for fresh cues.
Italy will offer three-year and 15-year bonds at an auction later on Wednesday, while Spain plans to sell bonds due 2029, 2040 and 2041 at a special, off-calendar auction on Thursday.
Traders said any signs of funding stress in the euro zone's third and fourth largest economies will no doubt weigh on the common currency.
A steady euro and the yen's pullback kept the dollar index off its seven-month high hit last week following strong U.S. payrolls data.
The dollar index stood at 82.51, down slightly on the day and below Friday's peak of 82.924, with immediate focus on U.S. retail sales data due at 1230 GMT.
While a strong reading could fuel speculation that the U.S. Federal Reserve may wind up its stimulus, some traders also say the market's expectations of an end in the Fed's quantitative easing might be premature.
"It is not like the Fed will exit from the QE at its next policy meeting. It's true the Fed board members are debating it but a lot of voting members on the Fed's policy board are dovish," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.
The Australian dollar stood not far from a 2-1/2-week high of $1.0336 hit on Tuesday, though initial resistance is seen around $1.0350-70, a level that capped the currency in February.
With Australia's relatively high yield and the Reserve Bank of Australia in no hurry to cut interest rates soon, the Aussie appeared to be back in favour for now.
Asia faces a dearth of major economic news on Wednesday. In Europe, consumer inflation data in France and Spain and industrial production in the euro zone are due.