* Investors expect easing steps at Thursday's ECB meeting
* Speculators upped short bets on euro in latest week-IMM
* Expectations of low inflation reading, EZ PMI miss weigh
By Anirban Nag
LONDON, June 2 (Reuters) - The euro fell against the dollar on Monday, as subdued inflation readings in Germany and slower-than-expected manufacturing growth in the euro zone piled pressure on the European Central Bank to aggressively ease monetary policy this week.
Currency speculators increased short positioning on the euro to 16,633 contracts from 9,220 last week, according to data for the week ended May 27 released by the Commodity Futures Trading Commission on Friday.
The ECB is preparing a package of policy options for its June 5 meeting that includes cuts in all its interest rates, Reuters reported last month.
The euro fell 0.2 percent to hit $1.3595 in the European session, not far from a three-month low of $1.3586 touched on Thursday. It also fell against sterling to 81.15 pence, with diverging monetary policy outlooks between the ECB and the Bank of England underpinning the pound.
"With market participants unwilling to be brave enough to take against-consensus euro long positions ahead of the meeting, and the potential for an upside surprise in U.S. data, we expect euro/dollar to remain under pressure," ING currency strategist Petr Krpata said.
In the United States, May ISM Manufacturing data is due out at 1400 GMT, and forecasts are for a reading of 55.5, up from 54.9 previously. That should bolster a view that the first-quarter blip in U.S. growth was caused by extraordinary factors.
"The euro should move back closer to $1.3600 level, while the 200-day moving average of $1.3644 is now an important level to watch," ING's Krpata said.
While growth in the U.S. manufacturing sector is set to accelerate, the final reading of the manufacturing Purchasing Managers' Index (PMI) for the euro zone disappointed. The index slipped to a six-month low of 52.2 in May from April's 53.4.
Additionally, data from German states on Monday suggested annual inflation in Europe's largest economy was slowing. The national rate is due to be released at 1200 GMT and a soft number could push down the broader euro zone rate.
Euro zone inflation data is due out on Tuesday.
In the options market too, investors were adding to bearish bets. The three-month risk reversal for the euro/dollar , a gauge of demand for options betting on a currency rising or falling, were showing greater bias for euro weakness.
"The 3-month risk reversal shows that the market prefers a bearish scenario. Traders are expecting a delivery from (ECB chief) Mario Draghi and a decision will probably put an end to the speculation on when the ECB will start quantitative easing," RTFX Fund Management portfolio manager Francesco Scotto said.
The yen wobbled as M&A news raised the prospects of more outflows, and strong China data whetted investors' risk appetite, lessening the appeal of the safe-haven currency.
"The yen-selling trend has strengthened today, partly due to the morning's Dai-ichi news, as well as the weekend China PMI data," Sumitomo Mitsui Trust Bank senior market economist Ayako Sera more than $5 billion.
Japanese insurer Dai-ichi Life Co is in advanced talks to buy U.S. insurer Protective Life Corp in a deal that could be worth over $5 billion.
On Sunday, China's official data showed factory activity expanded at its quickest pace in five months in May, underscoring Chinese economy's solid second quarter improvement.
The dollar bought 102 yen, up about 0.25 percent. Even the euro was a touch firmer at 138.80 yen.
(Additional reporting by Lisa Twaronite in TOKYO; Editing by Louise Ireland)