* Dollar drops after nearing one-month high vs yen
* Talk of Fed rate hike sooner than expected emerges
* U.S. short-term interest rate futures in focus
By Kaori Kaneko
TOKYO, June 8 (Reuters) - The dollar edged down against a basket of currencies on Monday after posting its largest one-day gain in more than five months following data showing the pace of U.S. job losses slowed sharply in May.
The smaller-than-expected job losses sparked concerns that the Federal Reserve may lift interest rates sooner than previously thought, prompting investors to reduce their dollar short-positions, dealers said.
The dollar rose to near a one-month high against the yen in early trade but then reversed those gains as investors sold the U.S. currency to take profits, with trade overall confined to a tight range, dealers said.
"It would be difficult for the dollar to climb further only on U.S. jobs data," said a trader at a Japanese bank.
"It is hard to imagine that U.S. labour conditions will recover steadily as job losses related to General Motors' bankruptcy filing are expected to appear in the data," he said.
The Labor Department said on Friday that U.S. employers cut 345,000 jobs in May, the fewest since September and far less than economists had forecast. They shed 504,000 jobs in April.
Talk of an interest rate hike coming sooner than previously thought pushed U.S. Treasury debt prices lower on Friday, while short-term interest rate futures, which track market expectations on the Federal Reserve's rate policy, advanced.
"The currency market is focusing on U.S. short-term interest rates as talk of a rate increase by the Federal Reserve has emerged," said Akira Takeuchi, a manager at Chuo Mitsui Trust and Banking.
Dealers said that market participants will focus on a slew of Treasuries auctions this week. The U.S. government is scheduled to sell $65 billion in debt including 10-year and 30-year securities.
"If longer-term Treasury yields rise on supply worries, this could weigh on the dollar," said Yuji Saito, head of FX sales department at Societe Generale.
The dollar index, a gauge of the greenback's value against a basket of six currencies, was down 0.1 percent to 80.571, shedding earlier gains.
The dollar index rose 1.6 percent on Friday, its best performance since Dec. 19, according to Reuters data. It rose 1.8 percent on the week, its largest weekly rise since April 12.
The euro was up 0.2 percent at $1.3991, recovering from a one-week low of $1.3925 hit earlier on trading platform EBS. Against the yen, the euro edged down 0.1 percent to 137.71 yen.
The dollar fell 0.2 percent to 98.43 yen after hitting a one-month high of 98.90 yen on EBS on Friday.
Sterling fell 0.3 percent to $1.5937 on political uncertainties in the UK.
Britain's Prime Minister Gordon Brown faced a renewed challenge to his leadership on Monday after support for the ruling Labour Party plunged to its lowest level in a century in European elections.
Commodity-linked currencies were supported as gains in Tokyo shares helped investor risk appetite. The Australian dollar rose 0.4 percent to $0.7970 and the New Zealand dollar was higher 0.2 percent to $0.6275. (Reporting by Kaori Kaneko; Editing by Joseph Radford)