* Dollar hits 7-month low vs yen; euro surges above $1.25
* U.S. economic data stokes worry of double-dip recession
* Dollar correlations with equities, gold break down (Adds details, updates prices)
By Wanfeng Zhou
NEW YORK, July 1 (Reuters) - The euro rallied to a five-week high above $1.25 on Thursday, while the dollar fell broadly after disappointing data heightened worries the U.S. economic recovery is stalling.
Concerns about euro zone debt and liquidity problems eased further on Thursday after Spain successfully sold 3.5 billion euros of a five-year bond, adding to positive sentiment a day after European banks borrowed less money than expected from a European Central Bank tender.
Gains in the single European currency accelerated after the euro broke key technical resistance levels around $1.2468 and $1.2470. Thinning liquidity ahead of the long Independence Day weekend in the United States exacerbated moves.
"There's a relief rally in the euro because we have gotten through the euro zone market events over the past 48 hours," said Amelia Bourdeau, senior currency strategist at UBS in Stamford, Connecticut. "The euro zone seemed to navigate those events successfully."
In late trading in New York, the euro EUR= advanced 2.4 percent to $1.2521, with the high at $1.2541 on electronic trading platform EBS EUR=EBS. It was the biggest one-day advance since mid-March.
Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey, said demand for the euro increased in late afternoon trading once stops were broken around $1.25, which prompted traders to rush to cover previous short positions ahead of a key U.S. monthly employment report on Friday.
"It's a holiday weekend, liquidity is low and people now are betting tomorrow's jobs numbers will be worse than expected. It is all helping the euro," he said.
Technical analysts at BNP Paribas said momentum favors a larger rebound toward $1.2570 to $1.2785 and recommended investors buy euro/dollar on dips.
"For the first time since December, euro/dollar monthly momentum (eight-month stochastic indicator) has stopped declining and ticked higher," the firm wrote to clients.
Against the yen, the dollar slid below 87 yen after reports showed a surprise rise in U.S. weekly jobless claims, along with a record fall in pending home sales and slower-than-forecast manufacturing growth. For more details, see [ID:nLDE6601S8]
"I think we're shifting away from euro-centric risk aversion to U.S.-centric risk aversion," said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.
The dollar was down 0.9 percent at 87.64 yen after going as low as 86.96 on EBS, its weakest in seven months JPY=EBS.
The inverse relationship between the dollar and equities was showing signs of breaking down on Thursday, as both Wall Street and the greenback fell.
For the past several weeks, the dollar has moved in the opposite direction to stocks, tending to rise when stocks fall as investors sought it as a safe haven.
Using daily prices, the 25-day correlation coefficient between the S&P 500 index and the U.S. dollar index .DXY was negative 0.13 on Thursday, Reuters data showed. The link began to weaken after last Wednesday's Federal Reserve policy meeting, at which policy makers offered a less upbeat view on the U.S. economy.
In mid-May, the correlation was as strong as negative 0.91.
Some analysts said the breakdown suggests market players are perhaps pricing in a greater risk of a double-dip recession in the United States, which could lead to an erosion in the dollar's appeal.
"Without solid growth and interest rate differentials to provide fundamental support, further gains in the greenback may be looking premature," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
The dollar's losses also came in tandem with declines in gold, which is often used as hedge against high-risk events.
Against the Swiss franc, the euro was up 0.8 percent at 1.3275 francs EURCHF= after earlier bottoming at 1.3073 on EBS EURCHF=EBS -- its weakest since the single currency's 1999 launch. The dollar was down 1.6 percent against the franc CHF=, earlier touching its lowest since mid April.
Against the yen, the euro was up 1.4 percent at 109.74 yen, recovering from an 8-1/2-year low hit this week EURJPY=. (Additional reporting by Nick Olivari and Jonathan Leff and Vivianne Rodrigues; Editing by Leslie Adler)