* Dollar index hits two-month lows
* Euro breaks above $1.13 for the first time since late Feb
* Sterling on defensive for UK elections
By Ian Chua
SYDNEY, May 7 (Reuters) - The dollar languished at its lowest in over two months against a basket of major currencies early on Thursday, under renewed pressure from disappointing data, while a further spike in German yields gave the euro some support.
Figures on Wednesday showed U.S. private sector employers in April hired the fewest workers in more than a year, raising a red flag for nonfarm payrolls due on Friday.
The dollar index slid as far as 93.882 - a low last seen in mid-February - before steadying at 94.134. It has fallen more than 6 percent from a 12-year peak of 100.39 set in March.
Dollar bulls are looking for evidence that the U.S. economy has bounced back following a very soft patch in the first quarter.
The euro jumped to a two-month high of $1.1371, continuing to pull away from a 12-year trough of $1.0457 plumbed in March. It last traded at $1.1344.
"EUR/USD is now in overbought territory but with positioning still net short and a big U.S. payrolls number looming there aren't too many sellers around," said Elsa Lignos, senior currency strategist at RBC.
Traders said the euro's resilience was partly due to a surge in Bund yields, which have jumped nearly 50 basis points in just over a week, outstripping a 34 basis point-rise in its U.S. peer.
Analysts said the move in Bund yields appeared to be driven by a shakeout of very crowded positions, but the impact is starting to be felt across financial markets.
Right on cue, Federal Reserve Chair Janet Yellen warned that low long-term U.S. interest rates could spike as the Fed normalises its policy, causing disruption across the financial system.
At a separate event, Atlanta Federal Reserve bank president Dennis Lockhart said market expectations for a September interest rate hike were in "reasonable alignment" with the central bank.
The euro also powered to a three-month high against sterling as Britons vote on Thursday in the most closely fought national election in a generation.
The common currency climbed as far as 74.49 pence , reaching a high last seen in mid-February. It was last at 74.41 pence.
Prime Minister David Cameron's Conservatives and Ed Miliband's opposition Labour Party have been neck and neck in opinion polls for months, indicating neither will win enough seats for an outright majority in the 650-seat parliament.
If neither wins an overall majority, talks will begin on Friday with smaller parties in a race to strike deals.