* US employment grows at fastest pace in 4 years
* Euro zone debt contagion issues weigh on sentiment
* Euro on track for biggest weekly loss since Oct 2008
* Sterling hits 1-yr low on uncertainty after UK vote
* Traders watching yen for signs of massive risk aversion
(Updates prices, adds comments. Changes byline)
By Steven C. Johnson and Vivianne Rodrigues
NEW YORK, May 7 (Reuters) - The euro recovered on Friday from a 14-month low against the dollar as German lawmakers approved a rescue for Greece while the dollar gained versus the yen after U.S. data showed employment grew at its fastest pace in four years.
Sterling hit a one-year low below $1.45 after the UK election left no party with an outright parliamentary majority but rebounded when Conservative Party leader David Cameron said he would try to form a minority government. For details, see [ID:nLAL004425]
Traders said speculation that the European Central Bank may act to support other indebted euro zone countries and banks also helped the euro rebound and eased fears that Greece's debt woes may spread.
The ECB declined to comment on the speculation.
Nonetheless, the euro was still headed for its worst week against the dollar since October 2008.
"We got positive news on the euro front as both houses of Germany's parliament approved the 110 billion euro Greek rescue," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington. "But the problem remains, 'Who is going to bail out Spain or Portugal if it turns out they need help?'"
Following parliamentary approval, German President Horst Koehler signed into law a bill authorizing the country's contribution to a multi-billion euro rescue package for Greece, his office said. [ID:nBAT005427]
In afternoon trading in New York, the euro last traded 0.6 percent higher at $1.2731 <EUR=> after falling to $1.2520 on Thursday, its lowest since March 2009. Against the yen <EURJPY=>, it rose 2 percent to 116.99 after dipping below 111 yen Thursday -- its lowest level since 2001.
Sterling was little changed at $1.4757 <GBP=D4>, off a one-year low of $1.4475 touched after the election results. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic of the election response in the gilt and sterling markets, double-click: here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
US ADDS 290,000 JOBS
A surprisingly large addition of 290,000 U.S. jobs in April boosted the dollar against the yen and helped currencies retrace some of their massive moves on Thursday when European debt worries were compounded by a huge intraday stock slide that was partly due to a trading error.
The dollar rose 1.5 percent to 91.90 yen <JPY=>, but it remained off a session peak above 93 yen touched after the jobs data.
"It reinforces the view that the U.S. is in a V-shaped recovery and means the Fed will likely hike rates sooner than central banks in Japan and Europe," Salvaggio said.
But events in Europe overshadowed the U.S. jobs data.
"Traders' main concern is the sovereign debt issue, even though signs the U.S. economy is picking up do make people see the dollar as a comparatively healthy currency at the moment," said Sebastien Galy, strategist at BNP Paribas in New York.
"The U.S. yield curve should have steepened much more and the dollar should have gotten a bigger boost against the yen on such strong jobs data, so we're not out of the woods."
Galy said traders still fear that debt problems in other euro zone countries, such as Spain and Portugal, may cause losses at European banks, leading to a general crisis of liquidity and confidence.
BNP Paribas this week predicted the euro would hit parity against the dollar in early 2011.
Salvaggio said that is why markets have latched onto hopes that the ECB could act to help banks, perhaps via currency swap lines or low-interest loans.
ECB President Jean-Claude Trichet said Thursday that officials had not discussed buying euro zone government debt. Meanwhile, European Central Bank Governing Council member Guy Quaden told a Belgian newspaper the euro zone is not about to break apart and market attacks on the likes of Spain and Portugal are purely speculative. [ID:nLDE64629A]
Finance officials from the Group of Seven nations convened a conference call Friday to discuss the Greek situation, although Japan's finance minister said he did not think they were considering joint currency intervention. [ID:nN06238681] and [ID:nTOE646036] (Editing by Theodore d'Afflisio)