* Dollar index hits two-month lows
* Euro breaks above $1.13 for the first time since late Feb
* Sterling on defensive for UK elections
* Aussie up slightly after fall on local job data
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, May 7 (Reuters) - The dollar languished near its lowest levels in over two months against a basket of major currencies on Thursday, under renewed pressure from disappointing U.S. data, while sterling braced for volatile trading ahead of an unpredictable UK election.
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 - its lowest since mid-February - and last stood at 94.207. 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 market is starting to question whether the Federal Reserve can raise rates with the current low economic growth. If the upcoming payroll data is weak, we could see clearer weakness in the dollar," said Minori Uchida, chief FX strategist at Bank of Tokyo-Mitsubishi UFJ in Tokyo.
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 $1.1363.
"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.
Higher yields tend to attract more bond investment -- by either foreign investors or domestic investors repatriating funds -- and thus support the currency.
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 of recent times.