* Peripheral bond spreads widen, hitting euro
* Fall below $1.30 in euro could accelerate losses
* Underlying trend in U.S. jobless claims still downward
* U.S. payrolls report on Friday to set dollar's direction (Recasts, updates prices, adds quotes)
By Gertrude Chavez-Dreyfuss
NEW YORK, Jan 6 (Reuters) - The euro tumbled to a five-week low against the dollar on Thursday and further losses were seen likely as a round of bond issues next week by peripheral euro zone economies raised concern about their high debt levels.
That caused peripheral spreads to widen versus benchmark German debt, hitting the euro zone single currency in a vicious spiral.
The euro is holding above $1.30 but if that level goes, some traders said it could fall to $1.2575 in fairly short order.
"It's continuing concern about the refinancing risk for euro zone countries in the next few weeks," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston.
"In general, the euro is suffering from some fundamental concerns about the sustainability of the currency itself in terms of the sovereign debt crisis."
Magnifying the euro's fall was continued outperformance of the dollar amid optimism about the U.S. economy, which is expected to report on Friday job gains of 175,000 for December, according to a Reuters poll. Some in the market are expecting employment gains of as much as 500,000.
"There's a strong consensus that there will be some good numbers coming out of the States tomorrow after that ADP report, and expectation of a huge payrolls number is fueling all sorts of dollar buying," said C.J. Gavsie, managing director of FX sales at BMO Capital Markets in Toronto.
In midday New York trading, the euro was down 1 percent at $1.3017 The euro also slid below its 200-day moving average around $1.3081, which accelerated its decline, with the currency falling as low as $1.3005.
Options traders said there has been steady demand for downside euro/dollar strikes around $1.26 over the next three months as investors hedged against expectations that euro area stresses will escalate.
The next big level is $1.2970, the December 2010 low.
Thursday's U.S. data was also generally supportive of the dollar. Although U.S. initial jobless claims rose more than expected in the latest week, a decline in the four-week average to a fresh low of more than two years indicated that the labor market is also on the mend.
The jobless claims report followed ADP data showing U.S. private sector employment posted a record increase last month of 297,000 jobs.
Traders said should this string of positive U.S. data continue, the euro is likely to bear the brunt of the dollar's rally.
"If you consider the fact that the U.S. recovery is far better than most major economies, then that kind of spells a lower euro," said Tim O'Sullivan, chief dealer at Forex.com, a division of Gain Capital in Bedminster, New Jersey.
"It is possible that the dollar is going to perform well now because of fundamentals, and the euro is bearing the weight of that right now."
The dollar slipped 0.1 percent against the yen to 83.17, which many traders believed was just a temporary blip.
Currency models from Credit Suisse suggested that if current U.S. bond yields hold, dollar/yen should rise to 89.5 or higher. And even if U.S. two-year yields retrace some of their recent gains, dollar/yen's fair value is estimated at 85.6, the bank said in a note.
The ICE Futures' dollar index, which measures the greenback's value against a basket of major currencies, was up 0.6 percent at 80.757, a sharp turnaround from last week's 78.775 trough.
Another key event this week is Fed Chairman Ben Bernanke's testimony on the U.S. economic outlook before the Senate Budget committee on Friday after the jobs report. (Additional reporting by Wanfeng Zhou, Steven C. Johnson and Julie Haviv; Editing by James Dalgleish)