* Dollar down for second day after rate rise expectations collapse
* Retreats to levels from before Japanese rate cut last week
* Euro back above $1.11
* Eyes on Fed officials later in day (New throughout after the start of European trade)
By Patrick Graham
LONDON, Feb 4 (Reuters) - The dollar was back on the defensive in early trade in Europe after a collapse in expectations of a further rise in U.S. interest rates this year drove its biggest daily fall in over two months on Wednesday.
Against a basket of currencies, the greenback fell another 0.5 percent to 96.796, its lowest since early November. The euro hit a 3-1/2 month high of $1.1161 EUR=EBS , extending its gains from an explosive sell-off a day earlier.
The triggers then were a weak batch of U.S. sentiment data and New York Fed President William Dudley's warning that a weakening outlook for the global economy would have to be taken into account for upcoming rate decisions.
Another warning by European Central Bank chief Mario Draghi that the bank would not hesitate in doing what was necessary to get inflation back to its roughly 2 percent target did little to weaken euro buying.
"The dollar is on its knees," said Richard Benson, head of portfolio management with currency fund Millennium in London.
"This morning I think it's just model flow on a lot of technical breaks yesterday. Probably we will now have some stability ahead of U.S. payrolls tomorrow."
Against the yen, the dollar has now given up all the gains inspired by a shock cut in Japanese interest rates last Friday. It traded 0.1 percent weaker at 117.77 yen. JPY=
The day's big set-piece is the Bank of England's "Super Thursday" cocktail of a monthly policy decision, meeting minutes and quarterly inflation report.
Independent of the dollar sell-off, sterling has been a big mover, bouncing 5 cents in the past two weeks as the government made progress in talks with Brussels over a new pact with which to fight a referendum on a Brexit from the European Union.
The pound rose 0.25 percent to $1.4631 and was flat against the euro but its bounce may well have cleared out a lot of the market positioning that analysts said halted its fall earlier this month.
Goldman Sachs (N:GS) warned in a note overnight that sterling could fall by as much as 15-20 percent if, as some polls suggest, Britons vote to leave the EU and inflows of foreign investment halt in response.
Expectations for any rise in UK interest rates have now all but collapsed for the next two years, a quarter point rise in rates now only fully priced in for 2018. SONIA
"It has been a solid move but if (BoE Governor) Mark Carney sounds soft on the economy today, we could see a drop back below $1.45," said Tobias Davis, a currency hedging manager with Western Union in London.
The moves on the dollar leave the European Central Bank and the Bank of Japan in a difficult spot, facing stronger currencies even after sending strong signals on their willingness to ease monetary conditions further.
"The BOJ might have tried to do something by opting for negative rates, but in reality the initiative belongs elsewhere. Dollar/yen is dictated by global risk sentiment, which also decides the trend in the currency market as a whole," said Junichi Ishikawa, market analyst at IG Securities in Tokyo.
"The BOJ can only do so much. The markets see through the fact that the central bank's efforts would not be effective in the absence of domestic demand, which is up to the government to create through its policies." (Editing by Shri Navaratnam and Eric Meijer; Editing by Tom Heneghan)