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FOREX-Yen breaches key level, hints at breakout higher

* Yen hits 3 1/2-month high against dollar * Euro steadies after two weeks of decline * Euro zone PMI data in focus this week * Fed minutes, China PMI, Japan trade data awaited this week By Patrick Graham LONDON, May 19 (Reuters) - The dollar slid to its weakest against the yen in more than three months on Monday as expectations of higher U.S. interest rates faded. The pound faced pressure from signs a major merger will fail.

The yen's break past 101.20 yen per dollar was the first time since November that it has traded stronger than its 200-day moving average. In nominal terms, it is the strongest since early February.

That reflected both a dip in U.S. treasury yields in the past week and the dollar's broader failure to deliver the strength many had expected this year.

But dealers said there were options barriers around 101.00 and talk of official buyers in Japan around 100.80 yen. That will block any further push before a two-day meeting of the Bank of Japan starts on Tuesday, they said.

"There does seem to be a lot of daylight above these levels, but around here I've gone into wait-and-see mode," said one London-based currency dealer.

"I'm not quite sure if the market has the energy at the moment to follow through on these kinds of moves. There do seem to be bids around 100.80/100.75 and we have the BoJ meeting coming up as well." The yen reached as high as 101.10 in morning trade in Europe before steadying.

"The chief reason is the slide in U.S. 10-year yields," said Alvin Tann, a currency strategist with Societe Generale in London. "I wouldn't be surprised if we got down to levels of 100 to 100.5." It has been a choppy couple of weeks for major currency markets, hamstrung this year by a lack of clear differentiation between the economic stories of Japan, Europe and the United States.

Growth is now moving at different rates, although official borrowing costs in all three remain near rock bottom. Signs the European Central Bank is preparing to loosen monetary conditions even further knocked the euro back last week.

The single currency gained 0.2 percent on Monday to $1.3717 after a volatile session on Friday.

Analysts from Credit Agricole said that the euro's resistance to further losses at the end of last week raised prospects it may head higher.

"This week's focus will be on PMI releases, which we expect to confirm a trend of further improving growth conditions," they said in a morning note.

"Under such conditions, position squaring-related EUR upside cannot be excluded. We advise against selling the single currency around the current levels. From a broader angle, however, we expect rallies to remain a sell." PFIZER BLOW Merger activity around a handful of Britain's biggest companies has been one factor helping sterling this year, and some dealers said AstraZeneca's rejection of Pfizer's latest bid could put some pressure on the UK currency.

The pound's performance gave little sign of it by midday on Monday, however. Sterling, one of this year's better performers among the majors thanks to an improving economy, fell just 0.1 percent versus the euro and was almost unchanged against the dollar.

"There are people talking about sales of the pound after this news," said one London-based currency dealer. "I don't know if that's because Pfizer had genuinely done some of this business or just because some people had been betting on it, but it would be a disappointment." Investors also await minutes later this week of the Federal Reserve's April 29-30 policy meeting, as well as a private survey on China's manufacturing sector for May.

The dollar index stood at 79.952, down slightly on the day after notching up a modest 0.2 percent gain last week, when it touched a six-week peak of 80.338 on Thursday.

Commodity currencies were sluggish as well with the Australian dollar just a touch lower at $0.9353 following a flat week. Traders said the 94 U.S. cent level is still providing a cap for the Aussie for now.

(Editing by Larry King)