By Jeremy Gaunt, European Investment Correspondent
LONDON, March 6 (Reuters) - U.S. job losses failed to match the wilder fears of financial markets on Friday, sending stocks higher and setting Wall Street up for a strong start.
The dollar, however, extended losses against a basket of major currencies, moving away from three-year highs.
U.S. employers axed 651,000 jobs in February, pushing the unemployment rate to its highest in 25 years and adding huge pressure to consumer sentiment.
But the number was essentially in line with mainstream expectations and nowhere close to as bad as some of the speculation that had swirled around markets earlier in the day.
The unemployment rate surged to 8.1 percent in February, the highest level since December 1983. That was above market forecasts for a rise to 7.9 from January's 7.6 percent.
"The numbers were weak and the unemployment rate is moving higher, but the markets have been primed to think that no matter what data you get, the results will only get worse," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.
"I think you'll start to see the market realize that though the unemployment rate goes up, the numbers aren't worse than expected. We're in that process now, with tough numbers, but not worse than expected."
The pan-European FTSEurofirst 300 rose out of negative territory and 0.8 percent higher in volatile trade.
Earlier, Japan's markets were hit hard by a spread of overnight worries about the U.S. banking sector.
Tokyo's Nikkei average dropped 3.5 percent to hit a four-month closing low and the broader Topix declined 2.7 percent to 721.39, a fresh 25-year closing low.
DECLINING DOLLAR
Jitters over the U.S. economy sent the dollar index, a gauge of the greenback's performance against a basket of currencies, down around 1 percent.
It was at three-year highs on Wednesday, however.
As a result of the dollar's weakness, the euro was up around 1.2 percent at $1.2717 and the dollar lost 0.4 percent to 97.56 yen.
Euro zone government bonds climbed, extending the previous session's rally.
The two-year Schatz yielded 1.173 percent, 1 basis point less than in late Thursday trade, while the 10-year Bund yield was 5 basis points down at 2.965 percent.
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(Editing by Ruth Pitchford)