* Euro broadly softer ahead of ECB policy review
* Disappointing Italian and German data hit sentiment
* Dollar suffers sudden selloff versus yen
By Ian Chua
SYDNEY, Aug 7 (Reuters) - The euro nursed broad losses early on Thursday after a batch of disappointing data from Italy and Germany soured sentiment for the currency just hours ahead of a policy review by the European Central Bank.
Italy unexpectedly slid back into recession in the second quarter, while German industrial orders in June posted their biggest monthly fall since September 2011.
Investors were quick to dump the euro, driving the currency to its lowest in over eight months against the yen at 136.16 . It skidded to a three-week low on the Swiss franc, hitting 1.2140 francs.
Against the dollar, the common currency initially slumped to a nine-month trough of $1.3333, but then erased all of its losses and then some to trade back at $1.3385.
The recovery came when the dollar went into a free fall against the yen in thin conditions just after European markets had closed.
It slid as far as 101.76 yen, from around 102.30 in a matter of a few minutes, prompting talk of a fat-finger trade, or a large order that created some indigestion.
"Yet a later examination by an institutional trade desk suggested that it was simply panic selling which forced many nervous speculators out of their leveraged positions," said David Rodriguez, strategist at DailyFX.
"The unexpected volatility underlines the risks below the surface as FX market volatility falls near record lows. Clearly many traders fear the next major currency move is just around the corner, and any especially crowded trades seem at risk as speculators will flee at the first sign of danger."
The dollar has since managed to recover only about half of the losses and was last at 102.13 yen.
With the excitement over, investors are now waiting for the outcome of the ECB policy meeting due later in the day.
The bank is expected to leave interest rates on hold as it assesses the impact of cuts made in June, when it also promised up to 1 trillion euros in cheap long-term loans to banks from September.
However, Wednesday's data coupled with persistently low inflation in the euro zone should keep alive market expectations for the bank to eventually turn to quantitative easing.
Markets will be looking at how ECB President Mario Draghi characterises the present state of the economy, given the risks to Germany's economy are rising and the effect of Russian sanctions and geopolitical risk may have lowered the ECB's outlook.
"An acknowledgement may be enough to send EUR lower, but the bigger risk is if they see these factors as only minimal or temporary. That may have a bigger positive impact on EUR; probably short-lived," said Emma Lawson, senior currency strategist at National Australia Bank in Sydney.
In Asia, employment figures out of Australia at 0130 GMT will be the highlight. The Aussie hit a one-week high of $0.9376 overnight, raising the risk of a pullback should the figures disappoint.
Analysts polled by Reuters expect the economy to have created 12,000 jobs in July and the unemployment rate to remain steady at a decade peak of 6.0 percent.
(Editing by Eric Meijer)