* Dollar falls broadly as euro recoups sharp losses
* Euro still seen vulnerable with pressure staying on ECB
* Euro zone PPI falls more than expected; German jobless up
* U.S. ADP report in focus ahead of non-farm payrolls
(Adds quotes, updates prices, changes byline)
By Tamawa Desai
LONDON, Jan 7 (Reuters) - The dollar fell broadly on Wednesday, reversing sharp gains against the euro earlier in the week as concerns over the U.S. economy and expectations for continued low U.S. interest rates overrode earlier optimism.
But the euro remained vulnerable as data showed a rapidly weakening economy and easing inflation, which raised prospects for the European Central Bank to cut rates again next week.
The dollar pushed back from one-month highs against the euro and yen on profit-taking, including central bank buying of euros at lower levels for reserve-management purposes and interest from funds.
"We've seen a substantial move in the past few days, so players are taking profits," said Neil Mellor, currency strategist at Bank of New York Mellon.
"It's hard to predict the trend based on price moves from the past few days as the market is still illiquid," he added.
Data on Wednesday showed euro zone producer prices fell sharply in November, logging a record monthly decline on a sharp drop in energy costs.
That came on the heels of data the previous day showing a smaller-than-expected rise in consumer prices, raising expectations that the European Central Bank will be ready to ease monetary policy, not only at its meeting next week, but also going forward.
Separate data showed a bigger-than-expected rise in German unemployment.
"Given widespread evidence of sharply diminishing inflationary pressures and deepening euro zone recession, we believe there is a compelling case for the ECB to cut interest rates appreciably further," said Howard Archer, economist at IHS Global Insight.
By 1159 GMT, the euro was up 0.8 percent on the day at $1.3616, having dipped to a one-month low of $1.3308 on Tuesday according to Reuters data.
The single currency clawed back some of its major losses against sterling to gain as high as 91.75 pence but stayed some way off record highs scored above 98 pence in late December.
The yen gave up some gains earlier in the global session on a newspaper report that Japan's government will seek to scrap capital gains taxes for foreigners investing in Japanese companies through funds, which could encourage capital flows into the country.
DOLLAR RALLY STALLS
The dollar fell 0.5 percent against a basket of six major currencies to 82.341, while it also retreated 0.5 percent to 93.19 yen after hitting one-month highs the previous day.
"The dollar rally is showing signs of fatigue. Maybe there is a bit of nervousness ahead of the U.S. non-farm payrolls on Friday," said Audrey Childe-Freeman, senior currency strategist at Brown-Brothers Harriman in London.
"The depressed state of the economy is something that is priced into the market already, but we've seen a remarkable recovery in the dollar and that's losing momentum. Plus non-farm payrolls will present a pretty ugly picture," she added.
U.S. data on Wednesday include a precursor to the Friday's job report, with the ADP private employment report, due at 1315 GMT, expected to show that 473,000 jobs were shed in December.
Minutes released on Tuesday from the U.S. Federal Reserve's policy-setting meeting last month showed concern that downside risks remain substantial, and indicated interest rates would remain low for an extended period. (Additional reporting by Veronica Brown; Editing by Victoria Main)