FOREX-Dollar rebound continues; sterling hedging cost soars

* Dollar continues modest rebound

* Cost of sterling volatility protection spikes ahead of election

* Swedish crown jumps on manufacturing PMI

* Aussie sags before RBA policy meeting on Tuesday

By Jemima Kelly

LONDON, May 4 (Reuters) - The dollar rose for a second day on Monday, building on a modest comeback from a two-week decline on the back of data suggesting that the U.S. economy might be stabilising following a recent soft patch.

Just three days before Britons vote in the closest-fought electoral race in recent history, the cost of protection against big swings in sterling's exchange rate spiked to its highest since the May 2010 British elections. Trade was thinned, though, by market holidays in Britain and Japan.

The dollar had slid around 5 percent against a basket of major currencies in the second half of April, with weaker-than-expected data casting doubt on whether the U.S. Federal Reserve would raise interest rates in the coming months.

But the U.S. currency rallied around 0.7 percent on Friday after numbers showed a jump in consumer sentiment and stronger-than-expected vehicle sales. On Monday, the dollar index was 0.3 percent higher at 95.532.

"We need to see a couple of weeks of good data from the U.S. for the dollar to pick up again and get back on track," said Sonja Marten, chief FX strategist at DZ Bank in Frankfurt. "If that doesn't materialise, then all bets are off."

Data on Friday showed speculators had pared back bets on the dollar, pushing the currency's net long positions to their lowest in 4 1/2 months.

"It's too early to call for a new trend of dollar strength at the moment," said Ulrich Leuchtmann, head of FX research at Commerzbank (Xetra: CBK100 - news) in Frankfurt. "The pain of those still betting that this is a correction has to increase."

As the greeback gained broadly, the euro slipped 0.6 percent to $1.1133, easing away from a two-month high of $1.1290 hit last week.

After stronger-than-expected Swedish manufacturing figures, the Swedish crown jumped almost a percent against the euro to 9.3210 crowns. Analysts said the currency's strength would put pressure on Sweden's central bank to ease policy, after it surprised markets by keeping rates on hold last week.

Sterling slipped 0.3 percent to a 10-day low of $1.5102 . A closely fought British parliamentary elections on Thursday looks likely to result in a "hung parliament" with no party winning an absolute majority. Trade was thinned by a UK bank holiday.

The one-week sterling/dollar implied volatility option GBPSWO=R, which expires on May 11, rose to 17.725 percent. That was its highest since the aftermath of 2010's parliamentary elections, which led to several days of wrangling between parties to form a coalition.

The Australian dollar slipped a third of a percent to $0.7827, amid speculation the Reserve Bank of Australia will cut interest rates at its policy meeting on Tuesday, and after Chinese factory activity slowed. (Additional reporting by Masayuki Kitano in Singapore and Ian Chua in Sydney; Editing by Tom Heneghan)