FOREX-U.S. dollar, yen gain on Europe debt woes

* Euro tumbles on Portugal, wider euro zone debt worries

Currencies

* Euro hits 8-1/2 mth low vs dollar

* Yen soars to near one-year highs vs euro

* US payrolls slip, but jobless rate falls, helping dollar (Updates, prices, adds comment)

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 5 (Reuters) - The U.S. dollar and yen gained on Friday as persistent worries about the euro zone's fiscal stability pushed investors further away from risky assets and sent the euro to an 8-1/2 month low against the greenback.

The cost of insuring the debt of Greece, Portugal and Spain against default hit record highs, according to CMA Data Vision, as Portugal backed a law that may further enlarge its swollen budget deficit. That caused further jitters and sent investors into traditional safe-haven assets, the euro hitting a near one-year trough against the yen.

"The market is nervous about contagion spreading in Southern Europe," said Dean Popplewell, chief currency strategist at FX brokerage firm OANDA in Toronto.

"You see that the sovereign debt of Greece, Spain and Portugal are all under threat and this is certainly weighing on the euro. So the directional trend in the dollar remains intact, with investors keen to take the dollar higher by default."

Fears about euro zone fiscal deficits overshadowed a key U.S. non-farm payrolls report for January, which showed job losses of 20,000, but a drop in the unemployment rate to 9.7 percent from 10 percent in December. See [ID:nN04115255].

Popplewell said investors seemed happy about the decline in the U.S. unemployment rate and that partly contributed to gains in the dollar.

In late afternoon trading, the euro EUR= fell 0.6 percent on the day to $1.3658 after falling as low as $1.3586, according to Reuters data, the lowest since May 2009.

For the week, the euro is on track to post a 1.4 percent fall at current prices, its fourth consecutive week of losses. The single European currency has tumbled around 10 percent from its December 2009 high around $1.5140.

The euro fell to 120.72 yen EURJPY=, the lowest since Feb. 24, 2009. It was last at 122.10, down 0.1 percent.

Investors tend to buy the yen and dollar in times of heightened risk aversion as they unwind trades in risky assets financed by both currencies' near zero interest rates.

"The dollar will benefit from the relative liquidity of the U.S. Treasury markets and the yen from Japan's low dependence on foreign financing," said Barclays Capital in a research note.

The ICE Futures' dollar index .DXY, a calculated measure which tracks the greenback's performance against a currency basket, climbed to 80.683, its strongest since July 2009. It last traded up 0.5 percent at 80.341.

Ongoing fiscal concerns in the euro zone cranked up implied volatility in the currency options market as one-week euro/dollar volumes EURSWO= traded as high 14.5 percent from 11.85 percent on Thursday.

Analysts said such a change on the day had not been seen since Lehman Brothers filed for bankruptcy in autumn 2008.

"The evolution of this (euro zone) crisis will have important bearing on the sustainability of the global recovery; a significant rise in general sovereign risk premium will constrain the ability of fiscal policy to respond aggressively to another downturn," Barclays said.