* Dollar holds most gains vs euro, currency basket
* Greenback supported after strong payrolls
* Analysts see consolidation ahead of Fed meeting (Adds comments, updates prices; changes byline)
By Vivianne Rodrigues
NEW YORK, Aug 10 (Reuters) - The dollar gained for a third straight day against a basket of currencies on Monday as investors continued to trade on the strong U.S. jobs numbers from Friday while awaiting the Federal Reserve's statement after its policy meeting later this week.
Analysts said extending the dollar's latest gains may hinge on the actions and words of the Fed, which will end a two-day meeting on Wednesday.
Friday's jobs data showed a smaller-than-expected fall in July U.S. payrolls, suggesting that employment may be turning the corner after months of extreme weakness.
Investors were waiting to see if the dollar's latest move was a sign of a breakdown of the recent correlation between the U.S. currency and risk demand -- in which economic data suggesting an improving global economy would batter a dollar trading off an ensuing rise in risk appetite.
"After the positive non-farm payroll data last week, the dollar gained across the board," said Dan Cook, a senior market analyst at IG Markets Inc., in Chicago. "I will definitely be watching this week to see if this is a continuing trend.
"If it looks as though the U.S. economy may recover faster than the other major economies, we may reach a point where dollar-based assets are more attractive," he added.
In afternoon trading in New York, the dollar was 0.4 percent higher at 79.305 against a basket of currencies.
The euro was 0.5 percent lower at $1.4119 after brushing off a surprisingly strong reading of euro-zone sentiment on Monday. The Sentix index produced a -17 reading for August, improving from -31.30 last month.
Against the yen, the dollar inched down 0.5 percent to 97.010 yen after rallying on Friday as high as 97.79 yen on EBS, its strongest level in nearly eight weeks.
Some analysts said a post-payrolls rise in Treasury yields helped to support the dollar as it increased the appeal of U.S. debt for some investors, including those from overseas.
Sterling fell below $1.65 for the first time in a week, extending losses that were triggered last week by the Bank of England's surprise expansion of its quantitative easing program. The pound fell as low as $1.6432, according to Reuters data. Declines accelerated after stop-losses were hit below $1.66, traders said.
Analysts said some of Monday's trading was based on technical levels.
"The dollar index is coming off a deeply oversold condition and bounced off the bottom of the Bollinger Bands," said Andrew Bekoff, chief investment strategist at Family Office Group in New York. "We have seen that rally take us back to the 20-day moving average at 78.79."
FED AWAITED
Analysts said that whether the dollar extends its latest gains may hinge on the actions of the Fed.
The central bank is seen holding the fed funds rate at the zero-0.25 percent level, and some analysts say it may try to discourage speculation of a near-term rate rise after the payrolls data boosted expectations of possible monetary tightening.
Markets are currently fully pricing a 25-basis-point rate hike by the end of January.
The Bank of Japan will announce its rate decision on Tuesday, while Norway's central bank will end a policy meeting on Wednesday. (Additional reporting by Nick Olivari in New York; Editing by Leslie Adler)