* Dollar reverses earlier gains on caution before US data
* Friday's U.S. jobs report is the key focus this week
* Dollar hits 4 mth high vs yen, then pares gains
(Updates prices; changes byline, dateline)
By Jessica Mortimer
LONDON, Jan 4 (Reuters) - The dollar dipped on Monday, reversing earlier gains as caution set in ahead of key U.S. data, leaving investors wary of pushing the U.S. currency up further after it hit a four-month high versus the yen.
Optimism about the prospects for a U.S. recovery have supported the dollar recently but analysts said more evidence of a strengthening economy was needed to justify further gains.
Investors were jittery in a busy week for U.S. data that will culminate in monthly jobs data on Friday.
This week's releases begin with the Institute for Supply Management's December manufacturing index, due at 1500 GMT, which is expected to show a reading of 54.3 versus 53.6 in November. <ECONUS>
A euro zone purchasing managers' survey which confirmed the region's manufacturing sector expanded at its fastest rate in 21 months [ID:nLDE6030JH] also boosted the euro against the dollar, while better-than-forecast UK data lifted sterling.
"People are coming back after the new year, but the market has been slow to settle back in and there's a reluctance to chase dollar strength in a week which includes U.S. payrolls data," said Daragh Maher, deputy head of FX strategy at Calyon.
By 1116 GMT, the euro <EUR=> was up 0.5 percent against the dollar at $1.4394.
The single currency recovered from earlier falls, which took it as low as $1.4257, testing a key chart support level around $1.4229 where the 200-day moving average sits, and in sight of December's low around $1.4218.
The dollar index <.DXY>, a gauge of the greenback's performance against six other major currencies, fell 0.4 percent to 77.522.
Sterling was up 0.2 percent against the dollar <GBP=D4> to $1.6211, helped by better-than-expected UK manufacturing PMI and mortgage approvals data. [ID:nLAG006027] [ID:nLDE6030PO]
Against the yen, the dollar was trading down 0.2 percent at 92.80 yen <JPY=> cutting earlier gains which lifted it to a four-month high of 93.22 yen on trading platform EBS. Traders said resistance was seen ahead of its 200-day moving average around 93.60 yen.
Higher longer-dated U.S. Treasury yields underpinned the dollar, particularly against the yen, traders said, with benchmark Treasury yields rising above 3.9 percent on Thursday, in sight of last year's high around 4 percent. [US/] <US10YT=RR>
The dollar has been well-supported since figures early last month showed the U.S. economy shed a much lower-than-expected 11,000 jobs in November, and the dollar index remained not far from a four-month high of 78.449.
This Friday's U.S. non-farm payrolls report for December is expected to show U.S. employers cut 20,000 jobs, according to economists polled by Reuters. [ECI/US]
"Data in the U.S. will be watched closely, starting with the ISM data today, and any strength will help support the dollar," BNP Paribas currency strategist Ian Stannard said.
Data released last week showed the number of U.S. workers filing new applications for jobless benefits unexpectedly fell in the week ending Dec. 26 to the lowest level in about 17 months. [ID:nN31170026]
"Following the surprisingly positive November labour market report, which led to the recovery of the dollar in December, further key data will now have to confirm the market view that the U.S. economy is experiencing a sustainable recovery," Commerzbank analysts said in a note to clients. (Reporting by Jessica Mortimer, editing by Mike Peacock)