* Euro falls to six-week low versus dollar
* Expectations of ECB action rise after GDP data
* Dollar pares gains after manufacturing and inflation data
* Dollar/yen option barriers at 103 yen
By Julie Haviv
NEW YORK, May 15 (Reuters) - The euro skidded to a six-week low versus the dollar on Wednesday as data showing an unexpectedly large contraction of the euro zone economy bolstered the case for more monetary easing by the European Central Bank.
The euro fell for a fifth straight session against the greenback after data showed Germany's economy crept back into growth at the start of the year but not by enough to stop the euro zone from contracting for a sixth straight quarter, and France slid into recession.
In contrast, the U.S. is showing signs of a recovery, underpinning expectations that the Federal Reserve may wind down its asset purchases program by the end of the year. That stance has helped push up U.S. bond yields and has driven the dollar to a 4-1/2-year high against the yen.
The dollar, however, pared gains after data showed manufacturing activity in New York state unexpectedly contracted in May as new orders and shipments of finished goods fell.
Inflation data also weighed, with U.S. producer prices recording their largest drop in three years in April, pointing to weak inflation pressures that should give the Federal Reserve latitude to keep monetary policy very accommodative.
"There was some profit taking in the dollar after the data, with the manufacturing report the biggest surprise," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.
"Nevertheless, the U.S. economy appears to be improving, albeit slowly, while the euro zone GDP data overnight reinforced expectations of additional easing from the ECB, either through lower interest rates or through nonstandard measures such as negative deposit rates," he said.
"That contrasts with a growing notion that the Fed is inching closer to an exit strategy," he said.
The euro fell as low as $1.2842, its lowest since April 4, and last traded down 0.3 percent against the dollar at $1.2878 , with exporter bids cited around $1.2880. Many investors are looking for the single currency to bounce towards $1.2900 before initiating fresh bets against it, expecting it to then fall towards $1.2740, traders said.
European Central Bank officials have said they could ease monetary policy further, and perhaps even take the deposit rate, the level at which banks park their surplus cash with the central bank, below zero if the economy slowed.
A cut in the deposit rate would make holding euros unattractive and could lead to a broad selloff.
Germany, the biggest economy in the currency bloc, grew by just 0.1 percent in the first quarter, weaker than forecast, while the second-largest economy, France entered a shallow recession after contracting by 0.2 percent in the same period. Overall, the euro zone contracted by 0.2 percent, compared with a 0.1 percent fall forecast.
DOLLAR RALLY VS YEN PAUSES
The dollar rose as high as 102.76 yen on Reuters trading platform, its highest since October 2008, but the dollar turned negative in the early morning North American session as U.S. Treasury bond prices, which move inversely to price, moved higher.
The dollar last traded at 102.20 yen, down 0.2 percent on the day. Option barriers are cited at 103 yen that could slow the dollar's rise, traders said. But the overall trend for more yen weakness remained.
The Bank of Japan could ease its already ultra-loose monetary policy even further as early as October if prices do not rise as quickly as projected, according to economists polled by Reuters.
"We are bullish about the dollar," said Howard Jones, advisor at RMG Wealth Management.
"The overriding factor to us is that there is potential for quantitative easing in the U.S. to taper and that should help the dollar. We are especially bullish dollar against the Swiss franc and the Australian dollar where we think there will be more returns."