* Dollar index at one-month high
* Market expectations high for U.S. non-farm payrolls data
* USD seen vulnerable to any disappointment in the numbers
* Euro nears stops below $1.2950, talk of bids at $1.2920
(Recasts, adds quote, changes dateline pvs SYDNEY/SINGAPORE)
By Anirban Nag
LONDON, Jan 7 (Reuters) - The dollar rose to a four-month high versus the euro and a one-month high against a basket of currencies on Friday ahead of U.S. jobs data, although dollar bulls risked disappointment if it fell short of expectations.
A sell-off in peripheral euro zone government bonds before a flurry of supply next week, an EU proposal that could force those who lend to banks to bear big losses should they fail and weaker-than-expected German retail sales numbers knocked the single currency lower.
The dollar rose against a basket of major currencies to 81.076, its highest since early December. The index has gained over 2 percent this week, benefiting from a slew of upbeat U.S. data including a report that showed a record number of private sector jobs were created in December.
This prompted analysts to upgrade their forecasts for non-farm payrolls to increase 175,000, up from 140,000 in an earlier Reuters survey. Some in the market are far more ambitious, looking for an increase of more than 450,000.
"There is a lot of weight that is being given to the U.S. jobs numbers and even if we get a decent number, there is a real risk that we could see a bounce in the euro/dollar," said Neil Mellor, currency strategist at Bank of New York Mellon.
"I am still not optimistic about the U.S. economy and interest rates."
Traders will also await Fed Chairman Ben Bernanke's testimony to the Senate. Faced with a newly-empowered Republican Party that is sceptical of the Fed's latest attempt to stimulate the U.S. economy, many expect Bernanke to temper some of the optimism surrounding the recent rebound in economic data.
EURO DEBT PROBLEMS REMAIN
The euro fell to as low as $1.2960 on trading platform EBS, after sliding more than 2 percent over the two previous days and briefly dipped below support in the $1.2970 area -- lows hit in late November and early December.
The $1.2960 level was the lowest since mid-September and not far from stop-loss offers said to lie below $1.2950.
While the euro would probably get some respite if the U.S. jobs data disappoints, any gains could be short-lived, said Robert Ryan, FX strategist at BNP Paribas in Singapore.
"If we don't get a big payrolls number the dollar is going to get whacked. I mean if it's below 100,000," Ryan said. "That should see the euro trade up in response, but then we don't see a sustained gain in the euro," Ryan said.
Traders, however, said there was talk of good bids for the euro at $1.2920, right near a cluster of intraday highs hit between mid-August to early September that now act as support.
With huge bond issuance from euro zone governments lined up in coming weeks, investors are likely to steer clear of the single currency if responses to these sales are not encouraging and borrowing costs keep rising.
The dollar advanced 0.3 percent to 83.55 yen after rising as high as 83.57 yen on EBS, its highest in two weeks. This was partially driven by dollar demand from hedge funds, traders said.
Dollar offers from Japanese exporters were said to be lurking above 84.50 yen, right around the greenback's mid-December peak of 84.51 yen.
(Additional reporting by Ian Chua in Sydney and Masayuki Kitano in Singapore)