FOREX-Dollar stumbles to 8-month low as U.S. gov't shutdown lingers on


* Dollar index at 8-month lows as euro extends gains

* Dollar weakens further after soft service sector data

* Reuters poll has euro and yen and pound weakening

* ECB and improved data support common currency

By Julie Haviv

NEW YORK, Oct 3 (Reuters) - The U.S. dollar fell for a fifth straight session against a basket of major currencies on Thursday, dropping to an eight-month low, on concerns about the ramifications of a lingering U.S. government shutdown.

If the partial U.S. government closure, the first in 17 years, ends soon, it is expected to have a limited effect on the U.S. economy, but economic fears will grow if the shutdown drags on.

A pronounced impact on the U.S. economy from the shutdown could delay a tapering of the Federal Reserve's bond buying program. The Fed's purchases are seen as negative for the dollar because they are tantamount to printing money, so a delay in tapering cause cause the dollar to drop.

President Barack Obama met with Republican and Democratic leaders in Congress late Wednesday to break the budget deadlock, which has shut down wide swaths of the government, but there was no breakthrough and each side blamed the other. Obama's healthcare law was at the center of the impasse.

The dollar index, which tracks the greenback against six currencies, hit a trough of 79.627, its lowest since February. It last traded at 79.648, down 0.3 percent on the day. The euro is the dominant component of the index.

"The euro has become the new safe haven in this environment," said Steven Englander, head of G10 strategy at CitiFX, a division of Citigroup, in New York.

"The situation in Washington has left the dollar vulnerable across the board and its underperformance against other majors like the euro is here to stay for the time being," he said.

The euro rose to an eight-month high against the dollar, supported by the weak U.S. data, apparent lack of concern by the European Central Bank about the currency's recent strength and better-than-expected euro zone data.

The euro last traded 0.5 percent higher at $1.3638, not far from the session's peak of $1.3645, its highest since Feb. 4.

Along with concerns about the government's closure, the dollar was weighed down by U.S. data showing growth in the services sector cooled last month as the pace of new orders dipped and hiring slowed.

The U.S. government standoff comes a few weeks ahead of the next political battle, one over the federal government's borrowing limit. Failure to raise the limit could result in a U.S. debt default.

Not increasing the U.S. debt ceiling could damage not only the United States but the rest of the global economy, International Monetary Fund chief Christine Lagarde said.

Meanwhile, the U.S. Labor Department said the government's employment report for September will not be released as scheduled on Friday because of the government shutdown. A new release date had not yet been set.

The dollar, nevertheless, barely reacted to data pointing to a healing labor market. The number of Americans filing new claims for jobless benefits edged higher last week but remained at pre-recession levels.

Higher-than-expected retail sales, a recovery in the euro zone services sector and a jump in Italy's services sector all underpinned the single currency.

Political stability achieved when the Italian government won a confidence vote on Wednesday also helped.

The euro continued to be buoyed by comments made by ECB President Mario Draghi, who on Wednesday after the ECB's monthly policy meeting appeared to show little concern about the euro's strength.

There were expectations that Draghi would talk the euro down by showing a readiness to offer more long-term loans to banks to keep money market rates from rising. Looser money market conditions and low rates make it less attractive to hold a currency.

"President Draghi's appearance is characterized by what he did not say, with little to contain the euro appreciation trend," said Tom Levinson, currency strategist at ING.

"Euro/dollar is primed for a test of its Feb. 1 high at $1.3711, levels the ECB back then was not prepared to accept."

According to a Reuters October foreign exchange poll, the euro's strength won't last as growth remains weak; the yen will weaken on more monetary stimulus from the Bank of Japan; and with the Bank of England's rate guidance still in doubt, the pound will fall.

The U.S. dollar is favored by IHS, a top forecaster.

More than 100 strategists were surveyed for the poll.

Against the yen, the euro was up 0.3 percent at 132.48 yen, while the dollar was down 0.1 percent at 97.24 yen, not far from the previous day's five-week low of 97.12 yen, according to Reuters data.