* Dollar index down 0.3 percent * Euro up, but gains limited on expectations of rate cut by ECB * Japan MoF data shows Japan capital outflow last week By Anirban Nag LONDON, April 25 (Reuters) - The dollar was weaker against the euro and yen on Thursday, hurt by a batch of soft data that have raised concerns about the pace of economic recovery in the United States. Gains for the single currency were likely to be limited by 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 euro zone economy which has slipped back into recession. Still, the euro gained 0.2 percent on Thursday to $1.3035 , moving away from a low of $1.2954 struck a day earlier after a German survey of business morale came in weaker than expected. There was support from signs that two months of political gridlock in Italy was coming to an end. The dollar index, which measures it against a basket of currencies, fell 0.3 percent to 82.808, having risen to 83.190 on Wednesday, its highest since April 4. It was down 0.2 percent to 99.20 yen. "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." Orders for durable goods marked their biggest drop in seven months in March, the U.S. jobs market has remained sluggish and retail sales have been weak, factors which could keep the Federal Reserve's ultra-loose policy well in place. 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 previous period, though economists predict that has slowed to around 1.5 percent in the current quarter. "Markets overall have been focused on earnings, but poor data in the U.S. is raising concerns about the U.S. outlook," said a foreign exchange market advisor at a Japanese firm in Tokyo. 100 YEN STILL SOME WAY The concerns over the 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 unveiled on April 4 has pushed Japanese investors to seek higher returns overseas, which would usher in further yen weakness. 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 to euro zone assets. "There is also strong demand for sovereign bonds of countries like Spain and Italy, and that could also support the euro," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.