FOREX-Euro edges up vs dollar in holiday-thinned trade

* Euro recovers vs dlr after Thursday's sharp fall

* Trading subdued as U.S markets shut for holiday

* Euro zone services PMI dips from May's 7-mth high

(adds quote, updates prices, adds details)

By Harpreet Bhal

LONDON, July 3 (Reuters) - The euro recovered against the dollar on Friday as traders picked up the single European currency following its fall the previous session, when weak U.S. jobs data helped lift the dollar across the board.

Some traders booked profits on the euro's slide on Thursday, while analysts said currency movements were aggravated due to thin volumes as U.S. markets were closed for the Independence Day holiday.

On Thursday, data showed U.S. employers cut a greater-than-expected 467,000 jobs in June, leading to heightened risk aversion on the back of pessimism about the recovery of the U.S. economy.

The bleak data pressured the euro and currencies perceived to be higher risk such as the Australian and New Zealand dollars, but the single European currency found its footing on Friday after selling subsided.

This kept the euro hovering at the $1.40 level, as some market players judged the sell-off in the euro -- which knocked it from a near three-week high around $1.42 hit earlier in the week -- may have been overdone.

"The big drift downwards that we saw (on Thursday) was simply stop-loss selling and that has now unwound," said Robert Minikin, senior currency strategist at Standard Chartered in London.

He added a slight recovery in the euro versus the yen after a 2 percent fall on Thursday indicated lower risk aversion.

At 1217 GMT, the euro was at $1.4006, up 0.5 percent from U.S. levels at 2130 GMT. On Thursday, the pair fell as low as $1.3927, its lowest since June 25.

The euro also recovered against the yen to trade up half a percent at 134.39 yen. The Australian dollar climbed 0.7 percent against the dollar to $0.7983, while the New Zealand dollar rose 1 percent at $0.6333.

The dollar index <.DXY>, which tracks the dollar's value against a basket of currencies, was up slightly at 80.290.

DIVERSIFICATION DEBATE Earlier in the session, the euro showed little reaction to data showing the euro zone Services Purchasing Managers Index (PMI) in June stood at 44.7, down from May's seven-month high of 44.8 [ID:nL3412103].

Separate figures showed euro zone retail sales fell 0.4 percent on the month in May, more than forecasts for a 0.1 percent slide [ID:nL3586161].

With the U.S. non-farm payrolls out of the way, investors will likely focus on a Group of Eight (G8) meeting on July 8-10 for any further debate on currency diversification plans.

A Japanese official said on Friday major countries should support the dollar as the key international currency at the summit, although emerging nations may discuss a new global reserve currency on the sidelines [ID:nT294215].

China has asked for a debate on a new global reserve currency when leaders from the G8 meet with the G5 emerging economies next week in Italy, a G8 source told Reuters.

"In the short term, moderate USD strength is likely to be in the global interest in terms of keeping long-term rates down and relieving what may emerge as commodity price pressures on inflation down the road," Barclays Capital Research said in a note to clients.

"So while it may be early to sell USD, the fact that the (diversification) discussion has become so public suggests that USD weakness would accompany a global recovery as confidence is restored in the medium and long term," the note said.