* Investors cautious over global economy, riskier assets * Yen pares early losses, Aussie dollar slips from highs * Euro zone manufacturing contracts again in March * Euro steady, below last week's 1-month high vs dollar By Neal Armstrong LONDON, April 2 (Reuters) - The yen turned higher on Monday while riskier currencies like the Australian dollar came off highs as support from surprisingly strong Chinese factory data faded and investors took a cautious view of prospects for the global economy. The euro was steady, staying near a one-month high against the dollar but remaining vulnerable to renewed bouts of selling as a weak euro zone manufacturing activity survey highlighted a grim outlook for the region. The single currency was helped by falls in Italian and Spanish bond yields, although trade was e "It seems like investors remain cautious with service sector data from China still to come this week and nothing to indicate an imminent policy response from the Chinese to the slowdown in their economy," said Valentin Marinov, head of European G10 currency strategy at Citi. "It's a week ahead of the long weekend with thin liquidity, making investors reluctant to express strong views and which limits the scope for meaningful returns ahead of Easter." The low-yielding yen, which tends to fall when risk appetite increases, recouped earlier losses, with the dollar up 0.25 percent at 82.60 yen and the euro down 0.2 percent at 110.21 yen. The Japanese currency was undermined by a weaker-than-expected reading of the Tankan survey of sentiment at big Japanese manufacturers, which put the spotlight on whether the Bank of Japan will ease monetary policy further as early as next week. In a sign of bearish market sentiment against the yen, a gauge of market positioning showed currency speculators had ramped up net short positions in the currency in the week ended March 27 to the highest since July 2007. The Australian dollar was up around 0.4 percent for the day at $1.0389, off a high of $1.0470 hit in Asian trade. The currency tends to benefit from any signs of improvement in the Chinese economy due to Australia's strong trade links with the country. But many analysts have recently expressed concerns it is overvalued. "The Chinese recovery is modest ... We like to sell Aussie on any rally," said George Saravelos, G10 currency strategist at Deutsche Bank. EURO VULNERABLE The euro was steady against the dollar at $1.3342, not far from a recent one-month high of $1.33857. However, this level may prove a tough hurdle to surmount after the euro twice failed to break above it last week. Traders said sentiment towards euro zone assets was dented earlier by reports that the Bundesbank would not accept the bonds of several countries, including Portugal, as collateral. Germany's central bank later denied the reports. "There's an increasing risk of a more prolonged recession in Europe and economic fundamentals argue in favour of a further downward adjustment in the euro, but for now the market is short which is preventing fresh selling," said Lee Hardman, currency analyst at BTM-UFJ. The market's focus will switch to U.S. ISM manufacturing data to be released at 1400 GMT, which is expected to show continued expansion, in contract to the euro zone. Sentiment towards the dollar remained negative after dovish rhetoric from U.S. Federal Reserve Chairman Ben Bernanke last week pushed the dollar to a one-month low against a basket of currencies. This has helped the euro to hold its ground against the U.S. currency. "Our baseline scenario is for the euro to stay rangebound between $1.25 and $1.40," Deutsche Bank's Saravelos said. (Additional reporting by Jessica Mortimer; Editing by John Stonestreet)

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