* Japan PM Abe: weaker yen can burden households, small firms
* Euro resumes downward trend after poor German data
* Dollar index falls again after Monday's sharp drop
* IMF cuts global growth outlook but upgrades view on U.S. (Updates market action, changes dateline, previous LONDON)
By Richard Leong
NEW YORK, Oct 7 (Reuters) - The euro fell on Tuesday on bets the European Central Bank will need to inject more stimulus to help the euro zone economy after data showed the German industrial sector suffered its worst month in more than 5-1/2 years.
A report showed a 4.0 percent month-on-month drop in German industrial output, falling far below a forecast of a 1.5 percent fall. It was the biggest drop since January 2009.
"Everyone is on the euro bear bandwagon right now," said David Rodriguez, quantitative strategist at DailyFX in New York.
The single currency fell 0.6 percent to 136.79 yen , bringing its year-to-date decline to 5.5 percent, while it slipped 0.08 percent against the U.S. dollar to $1.2644 , nearly 1.5 cents above the two-year low struck last week.
The euro zone's prospects remain dour. The International Monetary Fund warned there is about a 30 percent chance the region might fall into deflation this year as the group downgraded its global economic outlook.
The IMF also lowered its view on Japan but it boosted its call on U.S. economic growth this year to 2.2 percent from 1.7 percent three months ago.
The yen reached a near one-month high against the euro partly on remarks from Bank of Japan Governor Haruhiko Kuroda, who told a news conference there was no need to adjust monetary policy if BOJ's 2 percent inflation goal can be met in the middle of the financial year starting next April.
The dollar index, which measures the greenback against a basket of six major currencies, extended Monday's dramatic drop, which was its biggest one-day decline since January. The greenback failed to get much of a lift from the latest IMF forecast.
The dollar index fell 0.2 percent to 85.748 after rising to a four-year high on Friday.
The greenback shed 0.5 percent against the yen to 108.255 yen after reaching a six-year peak of 110.09 yen on the EBS trading platform last Thursday.
"Kuroda's comments suggest the BoJ is unlikely to ease policy anytime soon. So we are seeing some profit taking in long dollar/short yen positions," said Yujiro Goto, currency strategist at Nomura in London
Earlier on Tuesday, Japanese Prime Minister Shinzo Abe spoke in parliament, saying a weaker yen would help exporters but hurt importers of raw materials, including almost all Japan's energy needs. He has faced criticism in parliament over the slide in the currency as the BOJ has spent yen in a bid to boost inflation.
As expected, the BOJ left its policy unchanged on Tuesday. It kept its huge asset-buying program but offered a bleaker view on factory output, following signs that the world's third-largest economy was hit harder than expected by a sales tax hike in April. (Additional reporting by Anirban Nag in London; Masayuki Kitano in Singapore; Editing by Hugh Lawson and Jonathan Oatis)