* China news on reserve currency fuels dollar selling
* Euro gets support from stocks, manufacturing data
* Markets await U.S. jobs report, ECB meeting on Thursday
(Adds comments, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, July 1 (Reuters) - The U.S. dollar dropped to its lowest in more than three weeks against the euro on Wednesday, pressured by news China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit.
Gains in global stocks as well as improved manufacturing activity data in Europe and China have also hurt demand for the dollar as a safe haven.
But it was the report on China, citing sources, that fueled a steep round of dollar selling, adding to the currency's earlier losses in Asia and London.
"This remains an Achilles' heel for the dollar and will be a problem going into the G8 meeting," said Richard Franulovich, senior currency strategist, at Westpac in New York.
"I think this is making a mountain out of a molehill and I think China is playing games. The fear mow is that there could be a sharper G8 statement next week on this issue."
In late afternoon trading, the euro was up 0.8 percent on the day at $1.4147. It earlier traded as high as $1.4201 in the wake of the China news, its highest since June 5, according to Reuters data.
The ICE Futures' dollar index, a measure of the greenback's value against a basket of six major currencies, fell 0.6 percent to 79.649.
Other analysts were also skeptical about the China news.
"We are struck by the gap between China's declaratory policy -- what they say -- and their operational policy -- what they do," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York.
CHINA DOESN'T BACK RHETORIC
What China says sounds like they want to end the dollar's role as the top reserve currency, Chandler said, but the world's third-largest economy has not backed its rhetoric as it continues to accumulate dollars and Treasuries.
China remains the biggest holder of U.S. Treasuries with about $763.5 billion in holdings as of April, the latest data available from the U.S. Treasury Department. It has roughly $2 trillion in currency reserves and some estimates from analysts suggested China holds about 65 percent to 75 percent of these in dollars.
Earlier in the session, positive data on manufacturing in Europe and China boosted economic optimism around the world. That helped U.S. stocks and commodity currencies, such as the Canadian and Australian dollars.
"We're seeing risk appetite because of the manufacturing numbers but it's kind of a double-edged sword," said Greg Salvaggio, senior vice president for capital markets at Tempus Consulting in Washington. "I think there are still a lot of questions about the sustainability and depth of the U.S. recovery."
That said, a round of mixed U.S. data including readings on the labor, manufacturing and housing sectors, contributed to a bias toward dollar weakness as safe-haven support wanes, analysts said. But they warned that trading would remain volatile ahead of a key U.S. employment report on Thursday.
Economists expect the U.S. economy to have shed another 363,000 jobs in June after losing 345,000 in May. ECONUS]
Also on Thursday, the European Central Bank holds its policy meeting. The ECB is expected to leave rates unchanged and give more details on its asset-buying program.
The yen, meanwhile, struggled broadly as Japanese institutional investors sold the currency at the start of the new quarter. A smaller-than-forecast improvement in the Bank of Japan's June tankan corporate survey also weighed on the yen. ID:nT53503
The dollar rose 0.3 percent to 96.61 yen while the euro gained 1.1 percent to 136.71 yen.
(Additional reporting by Vivianne Rodrigues; Editing by Kenneth Barry)