* U.S. payrolls weaker than expected, weighing on dollar
* ECB bond buying, euro-zone data underpin euro
* Dollar/yen falls to 2-1/2-week low (Adds quote, U.S. data, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 3 (Reuters) - The dollar dropped across the board on Friday after data showed the U.S. economy created far fewer jobs than expected, although persistent euro zone debt problems may limit losses, particularly against the euro.
Many analysts viewed the weak employment report as an outlier amid a slew of generally positive U.S. data released the last few weeks that suggested the economy was slowly gaining traction.
Labor Department data showed U.S. nonfarm payrolls rose 39,000 last month, much weaker than expectations for 140,000 new jobs. Also, the unemployment rate increased to 9.8 percent.
While the numbers further support the Federal Reserve's quantitative easing program, which is a dollar-negative factor, analysts said the Fed would need a series of anemic data to exhaust all of the $600 billion allocated for boosting the economy.
"U.S. nonfarm payrolls are extremely volatile, so one data point is not probably enough to tell much about future trends," said Ugo Lancioni, currency strategist and portfolio manager at Neuberger Berman in London.
The firm has $180 billion in assets under management and Lancioni helps oversee the company's fixed-income assets totaling $about $80 billion.
"I don't think the big picture has changed much. Clearly, the U.S. is dealing with very high unemployment. But there are indications that the U.S. economy is gradually starting to pick up again," Lancioni said.
By contrast, the euro zone's peripheral countries remain mired in a deep pit of debt, which should keep the euro's downtrend intact for now. European authorities have bailed out Ireland but investors are still worried about which may be the next euro-area country to require assistance.
The euro, however, recovered on Friday, posting its best three-day gain since May, mainly due to the European Central Bank's purchases of peripheral euro zone bonds. On the week, the euro zone single currency was on track for a 0.7 percent rise.
KEY TECHNICAL LEVELS
In midday New York trade the euro was up 1.1 percent at $1.3369, blowing past the key 100-day moving average at $1.3325 and well above a 2-1/2-month low of $1.2969 hit on Tuesday.
The next key level to watch is $1.3467, the 38.2 percent retracement of the euro's move from its peak at $1.4283 in early November to the $1.2969 trough.
In the options market, analysts said negative sentiment on the euro had turned about two days ago and was now neutral.
David Tien, a director at Credit Suisse's Global Algorithmic Strategy and Modeling group in New York, said extreme demand for bearish options structures on the euro versus the dollar which began in mid-November has significantly diminished "as the extension of special ECB liquidity facilities appears to have calmed the market in the near term."
On Thursday, the ECB extended nonstandard provisions, committing to provide unlimited one-week, one-month and three-month funding for vulnerable euro zone banks until at least April.
A rise in euro zone service sector activity, retail sales and the Bundesbank's raising of Germany's growth forecasts for this year also supported the single currency.
In line with the euro's recovery, other euro-zone-linked assets such as exchange-traded funds also gained. The CurrencyShares Euro Trust traded on the Chicago Board Options Exchange rose 1.7 percent to $133.18. This ETF holds euro on-demand deposits in euro-denominated bank accounts.
The euro VIX index, meanwhile, declined to 13.85 percent, the lowest in about two weeks, suggesting easing anxiety about euro zone worries. This index measures the market's expectation of 30-day volatility of the dollar/euro exchange rate by applying the VIX methodology to options on the euro ETF.
Against the yen, the dollar fell to 2-1/2-week lows at 82.53. It was last at 82.70, down 1.4 percent. (Editing by James Dalgleish)