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FOREX-Euro losses linger after central bank's inflation pledge

* Euro off 0.36 percent against dollar * European policymakers more dovish than expected, strategist says * Yen sets fresh 10-week low vs dollar * U.S. nonfarm payrolls key to further dollar gains (Adds comments, background; updates prices) By Michael Connor NEW YORK, April 3 (Reuters) - The euro dropped on Thursday after the European Central Bank kept interest rates on hold and pledged to use unconventional monetary measures if needed to battle low inflation in the euro zone.

The decline of the common currency shared by 18 countries helped extend a broad rally in the U.S. dollar that traders say may be tested on Friday, when U.S. nonfarm payrolls data for March is scheduled to be released in Washington.

The euro had flirted in recent weeks with the key $1.40 level, not seen since 2011, but on Thursday dipped as low as $1.3736 during a news conference by ECB President Mario Draghi and later declined just below $1.37.

The euro last traded off 0.36 percent against the dollar at $1.3716, and was down 0.18 percent against the pound and 0.33 percent against the Japanese yen.

"The ECB is being slightly more dovish than the market expected," said Kathy Lien, managing director at BK Asset Management in New York. "The main takeaway is that the council is considering unusual techniques, and that's negative for euro/dollar." At its April meeting in Frankfurt, the ECB opened the door to using quantitative easing and other monetary policies meant to rescue the euro zone from worringly slow inflation.

Euro zone annual inflation ticked down to 0.5 percent in March, its lowest since 2009 when the economy was deep in recession, and its sixth month below 1 percent in what Draghi has described as "the danger zone." The euro's decline helped the dollar, with the U.S. dollar index up 0.33 percent to 80.83.

The dollar was also trading higher against the yen at 103.96 yen after touching a high of 104.11, a level last seen on Jan. 23.

The dollar's steady march higher against the yen has been the main move of the past two weeks on major currency markets, awakening hopes that the greenback may finally be set to deliver on the break higher, as predicted by many banks in January.

The dollar has gained almost 3 percent against the yen since March 19, when U.S. Federal Reserve chief Janet Yellen told markets that the Fed might raise interest rates next spring.

U.S. jobs data on Friday may be the decisive factor for any further gains.

"There is a lot of resistance (to more dollar gains) around 104 yen and we may not break that today," said a dealer with one bank in London. "The key to any move higher will be nonfarm payrolls tomorrow." U.S. nonfarm payrolls are expected to have increased by 200,000 in March, the largest gain in four months, according to a Reuters poll of economists.

"A jobs survey that suggests the U.S. economy is in bounce-back mode after a lull would stand to give the dollar a meaningful lift," Western Union Business Solutions currency strategist Joe Manimbo said in a commentary.

'LOW-FLATION' International Monetary Fund Managing Director Christine Lagarde on Wednesday had called on the ECB to ease monetary policy, warning "low-flation" in advanced economies risked undercutting an already sluggish global recovery.

But U.S. data has generally improved after a dip in fortunes in recent months, now largely put down to the harsh winter weather. Worries over China and Ukraine that prompted investors to seek the relative security of the yen have also slipped, at least momentarily, off the agenda.

A Reuters poll of over 60 foreign exchange strategists taken this week predicted the euro would fall to $1.37 in one month, $1.33 in six months and $1.29 in a year.

Steen Jacobsen, chief investment officer with leading retail FX platform Saxobank, sees the euro sinking to $1.25 this year on the back of more aggressive action later in the year to ease monetary conditions.

"You may argue that there is no real reason flows-wise for the euro to weaken, but I think for the lobbies and policymakers, $1.40 is a line they cannot cross," he said. "I think it will get there and that will lead to action." (Additional reporting by Patrick Graham in London; editing by Chizu Nomiyama and G Crosse)