* Euro hurt by concerns about Cyprus deal, Italian politics
* Aussie slides after China PMI disappoints
* Thin trade allows yen to firm despite BOJ easing hopes
* BOJ tankan:improvement in sentiment tad weaker than f'cast
By Sophie Knight and Hideyuki Sano
TOKYO, April 1 The euro sagged on Monday to approach a four-month low on concerns about the spillover from Cyprus' bailout terms, while the Aussie dollar was tripped up after data showed a slower rebound in Chinese factory activity in March than expected.
The yen firmed across the board as a few large purchases of the Japanese currency made a splash on a day with low liquidity and few participants, with most markets closed for Easter holidays.
The euro started the new quarter with a whimper, slipping 0.2 percent to $1.2791, just above a four-month low of $1.2750 hit last Wednesday. The common currency has slid steadily since February, when it hit a 14-month high of $1.3711.
At the weekend, the Cypriot central bank confirmed that major depositors in Cyprus's biggest bank would lose around 60 percent of savings over 100,000 euros, well above the initially touted cut of 30 to 40 percent.
"It wouldn't be unusual for the euro to drop to $1.25. Cyprus also reminded people of all the problems that dissuaded people from buying it before: low growth, unemployment and so on," said Daisuke Karakama, market economist at Mizuho Corporate Bank.
The euro has major support around $1.2680, a 61.8 percent retracement of its July-February rally. But a break there could open the way for a test of last year's low near $1.20.
Borrowing costs in Slovenia, seen by economists as one of the next potential candidates for a euro zone bailout, jumped over 100 basis points in the wake of the Cyprus bailout, while Italian borrowing costs reached their highest since November at a 5-year bond auction last week.
Appetite for Italian debt has been hurt by the deadlock in the country's politics since inconclusive elections a month ago, reinforcing the common currency's weakness.
At the weekend, President Giorgio Napolitano summoned 10 "wise men" to propose a series of urgent measures that could be backed by all parties, but the move offered little hope of overcoming the deep political divisions.
AUSSIE LOSES OUT ON CHINESE PMI Antipodean currencies were also off on Monday after underwhelming Chinese manufacturing data. The official Purchasing Managers' Index (PMI) reached 50.9 in March, stopping short of market expectations of a jump to 52 from February's 50.1. ////////////////////////////////////////////////////////
China PMI and industrial output graphic:///////////////////////////////////////////////////////
The Aussie fell 0.3 percent to $1.0393, edging close to support at its 200-day moving average that now comes in at $1.0383.
The Australian dollar also slumped 0.6 percent to 97.55 yen .
Buying pressure on the yen triggered losses for the U.S. dollar against the Japanese currency. The dollar fell 0.4 percent to about 93.89 yen.
"It looks like someone bought up yen, on a scale that wouldn't usually affect the market, but it caused a spike due to today's low liquidity," said Michiyoshi Kato, senior vice president of forex sales at Mizuho Corporate Bank.
Investors had earlier brushed off a disappointingly narrow improvement in Japanese business sentiment over the last quarter shown by the Bank of Japan's tankan survey, as the focus is more on the central bank's policy review later in the week.
The BOJ is widely expected to scale up its bond buying and to extend the maturities of the bonds it purchases under new Governor Haruhiko Kuroda.
Bets on a radical shift in the BOJ's policy has ramped the dollar up 20.9 percent against the yen in the last two quarters, pushing it to a 3-1/2 year high of 96.71 yen last month.
Market participants said the mood is cautious ahead of the European Central Bank's monetary policy review on Thursday and the monthly U.S. payroll data out on Friday.