* Euro rises 0.3 percent to $1.3260
* Potential for further rebound from ECB bond buying
* Overall euro downtrend prevails; U.S. jobs data due
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By Neal Armstrong
LONDON, Dec 3 (Reuters) - The euro edged higher on Friday as reported central bank buying of Portuguese and Irish debt in recent days soothed investor nerves and helped the currency rebound from a 2-1/2 month low, but sentiment remained fragile.
The market's immediate focus moved to U.S. payrolls data later in the day, with a surprisingly strong U.S. housing number on Thursday adding to budding optimism on the U.S. economy.
The euro stood at $1.3260, up 0.3 percent on the day and well above a 2-1/2 month low of $1.2969 plumbed on Tuesday after massive selling in euro zone periphery government bonds.
Traders said the ECB continued to buy Portuguese and Irish debt on Friday, easing investor panic over euro zone debt for now.
Large euro/dollar option expiries at $1.3200 and $1.3250 were slowing the rally, while the technical picture was helped by the euro holding above its 200-day moving average at $1.3123.
Some analysts said the euro's bounce could have further to go, given the positioning in the market and thin liquidity.
"The euro has further room to correct to the upside as strong ECB bond-buying will support sentiment and speculative positioning is short," said Manuel Oliveri, currency analyst at UBS in Zurich.
"It can move up to $1.3400/$1.3450 but it remains a sell on rallies - the overall trend is still down," he said.
Sentiment towards the smaller euro zone states remained precariously balanced after Standard and Poor's warned on Thursday it may downgrade Greece in three months.
"The ECB has done a good job in reassuring the markets this week and the euro zone PMI this morning has also helped, but the euro is not out of the woods yet," said Jane Foley, senior currency analyst at Rabobank.
The Markit Eurozone Services Purchasing Managers Index (PMI), which surveys more than 2,000 businesses ranging from banks to hotels, rose in November to 55.4 from 53.3 in October and beating an earlier flash estimate of 55.2.
The euro's 100-day moving average, at around $1.3327, was seen as the next resistance level. More important resistance lurked in the $1.3334-64 area, its August peak and a 38.2 percent retracement of its June-November rally.
The sharp fall in the yields on Spanish, Portuguese and other countries' bonds offset initial disappointment after ECB President Jean-Claude Trichet did not explicitly commit the bank to ramping up bond buying on Thursday.
PAYROLLS
Traders were looking to the U.S. jobs data, due at 1330 GMT, which is expected to show an increase of 140,000 jobs last month, according to a Reuters survey.
Although data on Thursday showed initial jobless claims rose more than expected, anecdotal evidence of strong sales around the Thanksgiving holiday and a surprise jump in the house sales index boosted investor risk appetite.
"The impact of today's U.S. payrolls report on risk appetite is likely to be the key determinant of the dollar's response. Since the trend has been towards stronger data flow in the U.S., a weak report is likely to represent a bigger shock to the market than strength," said Citibank analysts in a note to clients.
Some traders said a strong jobs figure was likely to encourage more risk appetite, which could help the euro.
The dollar changed hands at 83.50 yen, down 0.4 percent from late U.S. levels and off Monday's two-month high of 84.41 yen. Strong support was seen at the top end of the pair's Ichimoku cloud at around 83.18. (Additional reporting by Hideyuki Sano; editing by Stephen Nisbet)