* U.S. jobless claims fall to lowest since 2008
* Spanish yields rise after Wednesday's bond auction
* Bed Bath & Beyond lifts Nasdaq after healthy results
* Dow off 0.2 pct, S&P off 0.1 pct, Nasdaq up 0.3 pct
By Edward Krudy
NEW YORK, April 5 (Reuters) - U.S. stocks largely traded sideways on Thursday as growing pressure in Europe's debt markets raised concerns about the financial stability of the region and overshadowed what is expected to be a solid U.S . job s report on Friday.
The Dow and the S&P 500 slipped, putting them on track for three straight days of declines, but the Nasdaq advanced modestly, buoyed by shares of retailer Bed Bath & Beyond , which jumped 10 percent to a lifetime high after the company's quarterly results beat analysts' expectations.
The S&P 500 was on track for its biggest weekly drop of the year as yields on Spain's debt c ontinued to march higher and its equity market plumbed lows not seen since the height of the euro zone crisis last year.
Marc Pado, U.S. market strategist at DowBull.com in San Francisco, said that with yields creeping higher in Europe, investors were ge tting nervous after the S&P 500's 30 percent rise since October, fea ring a repeat of last year's euro zone debt debacle with its devastating impact on markets.
"It's been a non-stop advance that people are getting nervous about, worried about Europe especially because that's where you can get blindsided," he said.
Economists polled by Reuters expect the nonfarm payrolls report due on Friday will show the U.S. economy added 203,000 jobs in March. That would represent a fourth straight month of solid job creation, marking the longest stretch of monthly employment gains topping 200,000 since 1999.
The U.S. stock market is closed for the Good Friday holiday when the data is set to be released. The U.S. bond market will be open until noon.
The Dow Jones industrial average dropped 27.28 points, or 0.21 percent, to 13,047.47. The Standard & Poor's 500 Index fell 1.66 points, or 0.12 percent, to 1,397.30. The Nasdaq Composite Index gained 10.11 points, or 0.33 percent, to 3,078.20.
The S&P 500 is down 0.8 percent so far this week, its biggest weekly drop since the middle of December. Traders are becoming increasing concerned about the potential for a sterner retreat heading into the seasonally weak period starting in May.
"Over the last couple of days, a small sense of trepidation came back in that the market is able to correct, and people are kind of re-evaluating their books, saying where do I want to be positioned over the next three- to six-month horizon now that you've had such a great past six months,' said Seth Setrakian, co-head of U.S. equities at First New York Securities in New York.
Some retailers' shares advanced after the companies reported March same-store sales that topped forecasts as mild weather and an early Easter spurred consumers to shop for summer clothes and other seasonal items. The stronger-than-expected March sales prompted some retailers to raise their profit expectations for the quarter.
Shares of TJX Cos Inc, which operates the T.J.Maxx and Marshalls low-price chains, gained 2.3 percent to $40.30. The S&P retail index advanced 0.8 percent.
By mid-afternoon, Bed Bath & Beyond was up 9.7 percent at $72.67 - near its all-time high of $72.75 hit earlier in the day.
For March, the Thomson Reuters Same Store Sales Index registered a robust gain of 4.3 percent, exceeding the forecast of a 3.5 percent rise. Excluding the drug stores, the index rose 6.8 percent, well above the monthly same-store sales gains of 3 percent to 5 percent throughout 2011, according to Thomson Reuters.
Alcoa Inc plans to cut alumina production by 4 percent, becoming the first producer to take measures aimed at cutting oversupply that has pushed prices close to $300 per tonne. The company also looks set to post its second consecutive quarterly loss on Tuesday when it kicks off the first quarter earnings season. The shares fell 1.9 percent to $9.62.
In another indication that the U.S. labor market is slowly improving, government data on Thursday showed the number of Americans filing claims for new jobless benefits fell to the lowest in nearly four years last week.
The jobless claims data "remains going in the right direction as the U.S. economy recovers. It also jives with some of the manufacturing numbers we have been getting," Sean Kraus, chief investment officer of CitizensTrust in Pasadena, California.
Investors kept watch on Spain and its ability to meet budget targets in the wake of the Spanish government's poorly received bond sale on Wednesday. The anemic demand for Spain's bonds triggered fears about funding difficulties for weaker euro-zone countries, as the effects of the European Central Bank's huge liquidity injections may be diminishing.
The concern is that the rate the government pays to borrow will reach unsustainable levels, forcing a Greek-style default that would endanger the region's banks and plunge the bloc further in economic contraction.
An International Monetary Fund spokesman said on Thursday that Spain is facing "severe" challenges that call for sustained economic reforms by the government.
PPG Industries Inc climbed to an all-time high of $98.54 after the chemical maker forecast first-quarter profit above Wall Street's expectations and said it would lay off 2,000 workers, mostly in Europe, due to weak demand. By late afternoon, the stock was up 2.2 percent to $96.01.