FOREX-Dollar on back foot after U.S. service sector survey fans recession worries

* Dollar near 1-month low vs yen, euro recovers from 2

1/2-yr low

* U.S. payrolls data next big focus

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Hideyuki Sano

TOKYO, Oct 4 (Reuters) - The dollar stepped back on Friday

after a soft U.S. service sector survey stoked worries that

pressure from U.S. trade disputes with China and other countries

could spill over into the broader U.S. economy and tip it into a

recession.

The dollar index =USD fell to 98.905, shedding about 0.8%

after hitting 2 1/2-year high this week.

Against the yen, the U.S. currency eased to 106.91 yen

JPY= , having fallen to one-month low of 106.48 in U.S. trade

on Thursday. The euro stood at $1.0972 EUR= , extending its recovery

from a near 2 1/2-year low of $1.0879 set on Tuesday.

The survey from the U.S. Institute for Supply Management

(ISM) showed its non-manufacturing activity index falling to

52.6 in September, the lowest since August 2016, and far below

expectations of 55.1, from 56.4 in August. Coming on the heels of a similar survey on manufacturing,

announced on Tuesday, showing activity plunging to a more than

10-year low, the weak data increased fears of a U.S. recession.

A gauge of employment in the survey fell to 50.4 last month,

the lowest reading since February 2014, from 53.1 in August.

That does not bode well for the upcoming all-important U.S.

jobs data on Friday, said Daisuke Uno, chief strategist at

Sumitomo Mitsui Bank, noting the employment component in the ISM

has had a meaningful correlation with the payrolls data.

"It is reasonable to think the non-farm payrolls figure is

more likely than not to come on the disappointing side. It could

even fall below zero," he said.

The median economists forecast polled by Reuters is a rise

of 145,000 in September.

Heightened worries about the U.S. service sector increased

expectations that the U.S. Federal Reserve will cut interest

rates at the end of this month, undermining the dollar's yield

advantage.

Fed funds rate futures FFX9 FFF0 are almost fully

pricing in a 25 basis point rate cut and a high chance of

another cut by December.

But some market players think rate cuts are far from a done

deal.

"Opinions in markets over whether the Fed needs to cut rates

that much are divided. The dollar is not going to fall sharply

given not everyone thinks the Fed will cut rates this month,"

said Kazushige Kaida, forex manager at State Street.

Elsewhere, sterling traded at $1.2333 GBP=D4 , having risen

to one-week high of $1.2413 on Thursday after the head of a

group of eurosceptic lawmakers in Prime Minister Boris Johnson's

Conservative Party said the government's latest Brexit proposals

offered the possibility of a "tolerable deal."

Still, traders remained unsure whether Johnson's proposal to

replace the Irish border "backstop" was going to morph into a

final Brexit divorce agreement due to mixed messages coming from

both sides.