* Euro shaky as euro zone debt worries resurface
* Market expectations high for U.S. non-farm payrolls data
* USD seen vulnerable to any disappointment in the data
* Euro nears stops below $1.2950, talk of bids at $1.2920
By Ian Chua and Masayuki Kitano
SYDNEY/SINGAPORE, Jan 7 (Reuters) - The euro dropped to a four-month low versus a broadly firmer dollar on Friday ahead of U.S. jobs data, which is expected to provide more evidence of a stronger U.S. economic recovery.
A sell-off in peripheral euro zone government bonds before a flurry of supply next week and an EU proposal that could force those who lend to banks to bear big losses should they fail helped knock the single currency lower. [ID:nLDE7051NI]
The euro extended losses after sliding more than 2 percent over the two previous days and briefly dipped below support at the $1.2970 area -- lows hit in late November and early December.
"A break below here will open downside potential towards $1.2590," BNP Paribas strategists wrote in a note, referring to the euro's next significant trough on charts, hit in late August.
While the euro would likely get some respite if the U.S. jobs data disappoints, any gains could turn out to 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.
"If payrolls come in very weak, yes the dollar is in trouble but the euro zone is just as much in trouble. We still see it easing," Ryan added.
A surprisingly big increase in U.S. jobs such as 300,000 or more would boost the dollar and could also change the outlook for the global economy, Ryan said.
But such a scenario would also be positive for peripheral euro zone countries and help temper a sell-off in their government debt, and could eventually limit the euro's decline, Ryan said.
The euro dipped as low as $1.2965 on trading platform EBS, its lowest since mid-September and not far from stop-loss offers said to lie below $1.2950.
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.
The euro later trimmed its losses and stood at $1.3007
The dollar benefited from weakness in the euro and remained buoyed by the ADP report, which 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.
Graphic showing:
ADP vs. the Labor Department: http://r.reuters.com/sev94r
Jobless claims: http://r.reuters.com/sev94r
The dollar edged up 0.1 percent against a basket of major currencies to 80.839 <.DXY>.
The dollar held steady against the yen at 83.34 yen
Dollar offers from Japanese exporters were said to be lurking above 84.50 yen, right around the dollar's mid-December peak of 84.51 yen.
Macquarie bank analysts said increasing signs that a strong economic upswing is underway in the United States should provide support for the greenback over the first half of 2011.
"Beyond this, however, we think the USD could come under pressure again as the U.S. government's ever-growing budget deficit comes under increased scrutiny." (Additional reporting by Kaori Kaneko in Tokyo, Reuters FX analyst Krishna Kumar in Sydney) (Editing by Kim Coghill)