The U.S. dollar fell against the euro on Friday, extending the previous day's steep losses on concerns over the U.S. economic recovery after worse-than-expected U.S. jobs data.

The report showed a larger-than-expected drop in U.S. June nonfarm payrolls to 125,000, due to layoffs of temporary government workers, even as the unemployment rate unexpectedly fell to 9.5 percent.

The euro gained against the dollar as investors looked past economic problems in the euro zone and instead focused on the possibility of a stalled economic recovery in the U.S.

What this does is, it reinforces the market's view that the U.S. recovery is losing steam, said Greg Salvaggio, vice president of trading, Tempus Consulting in Washington. There's a growing concern in the market place right now that previously the U.S. was thought to be the economy which was going to drive forward regardless of events happening elsewhere in the world. Now there are some very, very serious concerns that the U.S. recovery is beginning to stumble.

Friday's U.S. jobs report follows weak housing and manufacturing data on Thursday and weak consumer confidence data earlier in the week.

In early New York trade, the euro last traded at $1.2592 on electronic trading platform EBS, up 0.7 percent on the day. The dollar was last at 87.35 yen on EBS, little changed on the day.

We are at a phase at the moment when the dollar reacts negatively to poor U.S. data, which we have quite a lot recently, said Tom Levinson, currency strategist at ING in London.

The euro was already bolstered by easing concerns about euro zone liquidity problems after a lower take-up of European Central Bank funding and successful bond auctions on Thursday.

The euro surged more than 2.0 percent on Thursday in its biggest one-day advance since mid-March last year. However, some analysts remained cautious on the single currency ahead of European bank stress test results and a Greek T-bill issue due later this month.

Options with a strike price at $1.2500 are set to expire later in the day on Friday.

MINING TAX

The Australian dollar jumped as high as $0.8510, before paring gains to trade at 0.8450, and also rose against the yen after the Australian government agreed to a watered-down version of a proposed mining tax, easing concerns the tax would hurt business investment.

The Australian dollar was buoyed by a mining tax deal reached in that country, said TJ Marta, chief market strategist at Marta on the Markets.

The greenback hit a seven-month low against the yen on Thursday. Japanese exporter offers were likely to emerge in the low 88 yen range, a dealer at a Japanese bank said.

One-month implied volatility for dollar/yen pulled back to around 12.55 from around 14 percent on Thursday. Option triggers were seen below 85 yen, traders said.

The dollar hit a 14-year low against the yen last November.

(Additional reporting by Wanfeng Zhou)

(Reporting by Nick Olivari)

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