GLOBAL MARKETS-Stocks start quarter in the red as US jobs report looms

* Second quarter starts with a whimper

* Japanese manufacturing gloom sets the tone

* U.S (Other OTC: UBGXF - news) . non-farm payrolls the big event Friday

By Jamie McGeever

LONDON, April 1 (Reuters) - Gloomy Japanese manufacturing data on Friday ensured a downbeat start to the second quarter, driving stocks lower and supporting safe-haven assets like gold and the yen as investors awaited a U.S. payrolls report later in the day.

Still bruised from a turbulent first quarter, investors took their cue from the Japanese data rather than more encouraging figures from China's manufacturers.

Europe's main indices fell as much as 2 percent, following a 3.5 percent slide in Japan's Nikkei, its steepest daily fall since mid-February. Shares (Berlin: DI6.BE - news) fell across Asia, and U.S. stock futures signalled about a 0.5 percent decline when trading opens .

The dollar was on the back foot, with the euro trading above $1.14 - its highest since October, and oil was down 2 percent, below $40 a barrel.

"The focus appears to be on the negative. A too-strong euro is keeping the lid on any upside in European equities and the best performing sector in Q1 - the basic resource sector - is beginning to give up its gains," said Brenda Kelly, head analyst at London Capital Group.

The pan-European index of leading 300 shares fell 2 percent to a one-month low of 1,298 points, Germany's DAX and France's CAC 40 were also down 2 percent, while Britain's FTSE 100 was down 1.2 percent.

Insurance stocks were among the biggest decliners, led by a 10 percent fall in Zurich Insurance (LSE: 0QP2.L - news) , as its shares traded without the attraction of its latest dividend payout.

Earlier, a profit-dampening rise in the yen and hedge fund selling for the new financial year hit Japanese stocks. But the real blow came from the Bank of Japan's survey of major manufacturers which found sentiment at its lowest in nearly three years.

The report crystallised concerns that the BOJ's shift to negative rates was not working. It (Other OTC: ITGL - news) also outweighed positive surveys from China that showed factory activity growing for the first time in nine months and a much needed pick-up in services .

MSCI (NYSE: MSCI - news) 's broadest index of Asia-Pacific shares outside Japan lost 1.4 percent.

ROLL ON PAYROLLS

In the first quarter, stocks plunged on global growth fears then rebounded as major central banks took ever more aggressive stimulus steps.

The latest twist was this week's surprisingly dovish tone from Federal Reserve Chair Janet Yellen, which saw investors further scale back expectations for how far and fast U.S. interest rates would rise in future.

Fed fund futures currently have one quarter-point increase priced in by December. Yields on two-year Treasury paper were down at one-month lows around 0.73 percent before edging back up to 0.75 percent.

Indeed, U.S. Treasuries enjoyed their best quarter in 4 1/2 years. Yields on 10-year notes dropped 50 basis points in the three months to March.

The focus on Friday was on the March U.S. employment report. Economists expect an increase of 205,000 jobs, an unchanged unemployment rate of 4.9 percent and a rise in average earnings of 0.2 percent in the month.

"A rate hike in April looks extremely unlikely, especially with Yellen in the dovish camp, but another strong jobs report today could make the June meeting much more interesting," said Craig Erlam, senior market analyst at Oanda.

The greenback suffered its largest quarterly percentage loss in more than five years. The dollar index against a basket of major currencies lost 4.1 percent and on Thursday hit its lowest since mid-October. It was last trading steady at 94.620.

The euro was up 0.4 percent at $1.1423, its highest in 5 1/2 months. The dollar fell a similar amount against the yen to 112.05 yen. It was as high as 113.80 early in the week.

Worries about oil oversupply seemed to dominate in Asia on Friday. U.S. crude fell 2.1 percent to $37.53 a barrel, while Brent also dropped 2.1 percent to $39.49.

Gold (Other OTC: GDCWF - news) was steadier at $1,231.70 an ounce, after notching up its biggest quarterly gain in nearly 30 years.

(Reporting by Jamie McGeever; Editing by Hugh Lawson)