* Drop in Treasury yields weighs on U.S. currency
* Investors ready for next week's Fed meeting
* 1-week implied vols for euro/dollar rise
(Updates prices, adds detail, adds comments)
NEW YORK, Oct 28 (Reuters) - The dollar fell on Thursday in tandem with Treasury yields, driving back to the weaker end of a well-worn range below $1.40 per euro, on talk Federal Reserve quantitative easing could be larger than expected.
A New York Federal Reserve survey of dealers and investors on the size of the stimulus program included scenarios of up to $1 trillion, a figure larger than recent estimates.
The bigger the move by the U.S. central bank to effectively print money, the more it will push down U.S. Treasury yields and reduce the attractiveness of dollar-based assets.
Dollar selling against the euro and other currencies by reserve managers also sent the U.S. currency lower.
"The issue is whether the market believes the Fed will deliver significant quantitative easing over a definitive time line," said Peter Frank, a currency strategist at Societe Generale in London. "If they do, the dollar will weaken."
In early New York trade, the euro had risen 0.9 percent on the day to $1.3898. This helped to push the dollar 1 percent lower versus a currency basket on the day though it is down only a marginal 0.6 percent for the year to date.
The 10-year Treasury note was up 12/32 in price to yield 2.68 percent, down from 2.72 percent late on Wednesday. An unexpected drop in initial weekly jobless claims on Thursday capped prices on U.S. Treasury debt though they were still up from the previous session.
"We are getting a little bit of a driver from lower yields," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "Lower yields and a lower dollar go together."
NARROWING SPREADS
Other analysts said the dollar was also weighed down by a narrowing spread between 10-year U.S. and euro zone government bonds.
Euro gains kept it above a one-week low around $1.3734 hit on electronic trading platform EBS on Wednesday, even as debt concerns in Ireland and Greece and a breakdown in budget talks in Portugal highlighted problems facing periphery euro zone countries.
Frank said support for the euro despite sovereign debt issues illustrated the resilience of the single currency, and that he expected it to rise back above $1.40 in the near term.
But worries about the banking sector and the region's debt problems could check the euro's gains. The European Central Bank's quarterly Bank Lending Survey said more banks expect to tighten their credit standards for corporate loans in Q4.
The news could check hawkish ECB intentions to scale back emergency stimulus measures, said Tom Levinson, a forex strategist at ING. "This serves as a warning on what is going on in the real economy. It's less of a positive for euro but the real dominant force is still the U.S. story."
U.S. STORY
Wall Street analysts expect the Federal Reserve to buy $80 billion to $100 billion worth of assets per month under a new programme widely expected to be unveiled on Nov. 3, according to a Reuters poll.
Estimates for how much the Fed will eventually spend varied from $250 billion to $2 trillion. The market has been scaling back expectations as the event draws nearer.
Lingering uncertainty about how the Fed will announce more QE has increased market volatility, with one-week implied volatility for euro/dollar jumping to 15.3 percent on Thursday from 12.6 percent at the start of the week. Against the yen, the dollar fell 0.9 percent to 80.93 yen. Small stop loss were cited by traders in the 80.90 area with bids at 80.60 and 80.40. There are also solid 80.00 barriers.
The Japanese currency showed little reaction to a Bank of Japan decision to keep interest rates virtually at zero while holding off from new policy initiatives.
At current levels the dollar is holding above a 15-year low of 80.41 yen hit earlier this week on EBS, but investors remain vigilant for any yen-weakening intervention after authorities entered the market last month.
Elsewhere, a buyer of the Powershares Bullish Dollar Fund, an exchange traded fund, bought 55,400 March 23 calls at 61 cents each and 105,500 March 24 calls at 34 cents. Both positions are opening buys and appear to reflect expectations for a dollar rally through March 2011. (Additional reporting by Doris Frankel in Chicago and Naomi Tajitsu in London) (Reporting by Nick Olivari; Editing by Andrew Hay)