* Yen rises to highest since November versus dollar
* Benchmark 10-year JGB yield hits 7-year low
* Economic data, slumping bond yields pushing dollar lower
* Markets on edge over risk of currency intervention (Adds JGB yield fall)
By Rie Ishiguro
TOKYO, Aug 4 (Reuters) - Japan's finance minister reiterated on Wednesday that he is closely watching currency moves as a sell-off in the dollar due to worries about the U.S. economy tests Japanese policymakers' tolerance for a stronger yen.
The yen's advance is raising alarm in Japan due to worries it could prolong deflation and hurt the country's export-driven economy just as the U.S. and Chinese economies show signs of slowing down.
Reflecting such concern, the benchmark 10-year government bond yield hit a seven-year low below 1.0 percent on Wednesday.
"We're watching closely," Finance Minister Yoshihiko Noda told reporters when asked about the yen's rise.
The dollar fell to an eight-month low of 85.47 yen on Wednesday, and is edging closer to levels it has not traded at for 15 years.
The 10-year Japanese government bond yield slid to as low as 0.995 percent, down 4 basis points on the day, and its lowest in seven years.
The latest impetus for the JGB rally comes from a run of disappointing U.S. data that has reinforced concerns the U.S. economic recovery is losing steam, sparking a renewed rally in U.S. Treasuries and pushing the dollar towards its lowest levels against the yen since 1995.
But some analysts say there is not much room for further declines in Japanese bond yields.
"Japanese bonds are overbought and there is a risk of a bounce in yields. I think 10-year JGB yields will move in a 0.95-1.15 percent range until the end of September," said Nobuto Yamazaki, executive fund manager at DIAM Asset Management in Tokyo.
The dollar index, a measure of the greenback against six major currencies, was at its lowest since April as a string of weak U.S. economic data and speculation the Federal Reserve may consider pumping more money into the economy sent yields on benchmark two-year Treasury notes to a record low.
Japan has not intervened in currency markets since a 15-month period up to March 2004 when authorities sold 35 trillion yen ($408 billion) to curb the yen's strength and support the country's exporting industries. ($1=85.80 Yen) (Additional reporting by Stanley White, writing by Leika Kihara; Editing by Michael Watson)