* Euro hits 11-wk high $1.3085, $1.3050 barriers broken
* Dollar index hits three-month low 81.577
* Investors watching whether euro can climb above $1.3125
* Investors buy euros before month-end, c.bank demand seen
By Naomi Tajitsu
LONDON, July 29 (Reuters) - The euro hit an 11-week high against a broadly weak dollar on Thursday as month-end demand for the single currency helped push it above a key barrier.
Market participants said demand for euros from an Asian central bank in early European trade had sparked wider demand for the single currency, helping push the dollar to a three-month low versus a currency basket.
By 1001 GMT, the euro had climbed 0.7 percent on the day to $1.3085 on electronic trading platform EBS, its highest since May 10.
Gains in the euro helped push the dollar down to 81.596 versus a currency basket, its weakest since late April.
"There are a lot of orders in the $1.3050 area which had been targeted. When those were triggered it made for a higher euro/dollar," said Lutz Karpowitz, strategist at Commerzbank in Frankfurt.
"It's a matter of technical factors that is driving the market today."
Data showing a slide in Germany's jobless rate in July and a rise in euro zone economic sentiment this month also helped to support the single currency.
Stop-loss orders in the euro triggered above $1.3050 accelerated gains the currency's gains, market players said.
Investors are now focusing on whether the euro can extend its rally to $1.3125, the 38.2 percent Fibonacci retracement of the single currency's peak-to-trough move from November 2009 to June.
Against the yen, the euro rose around 0.4 percent to a session high of 114.21 yen according to Reuters data, recovering from early losses and edging back up towards 114.74 yen struck on EBS on Wednesday.
The euro slipped in Asian trade due to month-end selling by Japanese exporters, Tokyo-based traders said, adding that more offers may emerge if the euro rises towards 115 yen.
The dollar dipped 0.2 percent to 87.07 yen, and posted bigger losses against sterling, which hit a five-month high, and against the Australian and New Zealand currencies.
Some in the market said California Governor Arnold Schwarzenegger's announcement that the state was in a state of emergency over its finances was another reason to dump the dollar as it highlighted the fiscal problems in the country.
MONTH-END EURO DEMAND
Analysts said investors who had been wary of buying the euro before last week's bank stress test results were picking up the single currency again before the month ends, while ongoing short covering would also work in the euro's favour.
At the same time, Citi analysts said investors would sell dollars before the end of the month to hedge the currency exposure on their holdings of U.S. assets.
In a note, they said investors continued to buy U.S. equities into the end of July as U.S. stock markets outperformed the rise in other global equities.
"This suggests that investors will be on balance net sellers of USD to bring their hedges in line with the increased value of their U.S. assets," they said, adding that the signal to sell dollars was "quite strong".
Analysts said that despite a run of weak U.S. economic data, ongoing optimism about second-quarter corporate earnings would add to the view of an improving global economy and support shares, keeping euro demand intact.
European stocks rose 0.4 percent on Friday.
The New Zealand dollar rose 1.0 percent to $0.7286, recovering from an earlier fall after the central bank raised interest rates by a quarter point, as widely expected, but warned that further hikes could be more gradual.
The New Zealand dollar's recovery was aided by a rise in the Australian dollar, which climbed more than 1 percent to $0.9038, nearing an 11-week high hit earlier in the week. (Editing by Hugh Lawson)