* U.S. private sector jobs rise in December
* Dollar on pace for best one-day rise in 3-1/2 months
* Portugal borrowing costs soar, Spain issuance on horizon (Rewrites, updates prices, adds quotes, U.S. data, changes byline, dateline; previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, Jan 5 (Reuters) - The dollar jumped on Wednesday and may likely extend gains over the next few weeks after strong U.S. private-sector jobs data reinforced expectations of a self-sustaining recovery in the world's largest economy.
The greenback was on pace for its best one-day gain in more than three months against the yen and more than two weeks against the euro.
The ADP Employer Services report, which showed U.S. private employers added 297,000 jobs in December, further propelled an already rising dollar. The ADP number was the largest increase on record, with data going back to 2000, and exceeded market expectations for employment gains of 100,000.
"If, in fact, employment is kicking in, then that would set the tone for self-sustained growth, underpin interest rates, and very much underpin the dollar," said Bob Sinche, head of FX strategy at RBS Global Banking and Markets.
Analysts said the private sector employment survey bodes well for Friday's U.S. non-farm payrolls number, which is expected to show gains of 140,000 overall jobs -- and 145,000 private-sector jobs -- last month.
The ADP jobs data followed a series of upbeat U.S. economic reports this week suggesting the U.S. recovery seemed genuine and not merely because of short-term government stimulus measures. Earlier this week U.S. factory orders, construction spending and a manufacturing index showed stronger readings as well.
As a result, Sinche said, RBS is "pretty constructive on the dollar this year." He expects the euro to fall into the low $1.20s against the dollar by mid-year, while dollar/yen could rise above 85.
In early New York trading, the dollar index, which measures the greenback's value against six major currencies, was up 1.0 percent at 80.245. The dollar surged 1.3 percent against the yen to 83.13 yen.
The euro fell 1.2 percent to $1.3141, within striking distance of a key 200-day moving average just below $1.31. This level has staunchly supported the euro over the last two weeks and its breach could signal further selling.
The next big level to watch is $1.3125.
The Swiss National Bank stopped accepting Irish government bonds as collateral in its money market operations, a move that also dented sentiment toward the euro.
Portugal, another debt-laden euro zone country, has come under increasing pressure from international debt markets on concerns it may be forced to follow Greece and Ireland and seek a bailout. Demand for its Portuguese Treasury bills was solid on Wednesday, but yields continued rise.
Market focus was shifting to Spanish debt issuance for 2011, the first tranche of which comes up for auction next week.
"It's not out of the question that speculators could target Spain in the same way they targeted Ireland," said Stephen Gallo, head of Market Analysis at Schneider Foreign Exchange.