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TOKYO, Oct 3 (Reuters) The dollar stayed under pressure on Tuesday after data showed US manufacturing growth slowed to its weakest in 16 months, bolstering expectations that a slowing economy could prompt the Federal Reserve to cut interest rates.

The dollar fell after the Institute for Supply Management's manufacturing index eased in September but some traders said it was too early to say whether the data would trigger lasting losses in the currency.

''The weak ISM was a bit of a surprise, so the dollar's down,'' said Takehiko Jimbo, forex manager at Mitsubishi UFJ Trust and Banking.

''But we've seen (the dollar recover from weak data) time and time again, so it's still not clear whether a trend has begun.'' He added that the U.S. currency continued to be torn between its interest rate advantage over rival currencies and growing signs of an economic slowdown.

Others in the market said that the disappointing ISM data served as a wake-up call for those who believe that the dollar could keep brushing off weak figures.

''People are now looking for any weakness in the U.S. economy, so the dollar will react to anything that shows that,'' said Luke Waddington, head of forex trading in Tokyo at Royal Bank of Scotland.

''The view is that U.S. rates have not only peaked but the forecast for a cut has come forward a bit,'' he said.

Eurodollar futures are factoring in a rate cut during the first half of 2007, possibly as early as the first quarter.

The yen ticked up to the day's high against the dollar and the euro after Japan's new Finance Minister Koji Omi said that economic conditions had made it safe for the government to declare an end to deflation.

Omi's comments came a day after a stronger-than-expected business sentiment poll taken by the Bank of Japan showed that the domestic economic recovery was chugging along.

Dealers said the market was looking to the week's main event, U.S. non-farm payrolls data for September due on Friday, to get a better idea of whether the Fed will cut rates in the near- to mid-term.

CENTRAL BANKS LINED UP The dollar was little changed at 117.65 yen by 0250 GMT, near the low of 117.53 yen touched in New York after the ISM's factory activity index fell to 52.9 last month from 54.5 in August, hitting its lowest level since May 2005.

The euro was also nearly flat at $1.2740 after climbing to around $1.2760 on Monday.

The single currency hovered around 150 yen, within striking distance of a record peak of 150.73 yen hit late in August.

The euro was supported by expectations that the European Central Bank will raise rates from 3 percent when it holds a policy meeting on Thursday.

With U.S. rates at 5.25 percent, a hike by the ECB -- one of a trio of central banks holding meetings this week -- would narrow the yield advantage the dollar has over the euro.

The Reserve Bank of Australia is widely expected to hold rates at 6 percent on Wednesday, but some traders said there was a small risk that the Bank of England could bump up rates on Thursday after a surprise tightening to 4.75 percent in August.

Before the ECB meets, dealers were awaiting data on euro zone producer prices for August due at 0900 GMT to see whether inflation risks are being maintained at the wholesale level.

Forecasts are for the PPI to rise 0.2 percent on the month and 5.7 percent from a year earlier.

Also in focus is a speech by Kansas City Fed President Thomas Hoenig later in the session, for clues to the Fed's outlook for the economy.

REUTERS AKJ RK1015