* Euro hit 2-1/2-year peak vs dollar before U.S. jobs data
* Jobs increases better than forecast
By Michael Connor
NEW YORK, March 7 (Reuters) - The dollar rose on Friday, boosted by an unexpectedly large jump in U.S. jobs growth that touched off enough buying to lift the greenback from a four-month low.
The U.S. dollar index, a composite of six currency pairs which earlier on Friday had hit a bottom of 79.433 last seen on Oct. 29, reversed course after the release of February's U.S. employment data and rose 0.17 percent to 79.790.
The dollar was up 0.54 percent against the yen to 103.64 yen and flat against the euro, which earlier had hit a 2-1/2 year high against the dollar on signs the European Central Bank's balance sheet was shrinking.
Traders shifted gears when the U.S. Labor Department reported that America's employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January. Forecasts had been for gains of about 149,000, according to a Reuters poll.
The unemployment rate rose to 6.7 percent from a five-year low of 6.6 percent but the reports from Washington eased widely held worries that the U.S. economic recovery was stuck in a soft patch.
"It is stronger than expected on several fronts. That the numbers came even while weather was bad shows the underlying strength of the economy," said Camilla Sutton, currency strategist at Scotia Capital in Toronto. "It is good for the U.S. dollar."
The data portraying job market improvements also meant the Federal Reserve was unlikely to slow its winding down of its bond-buying stimulus program now running at $65 billion a month, according to Sutton and other institutional investors.
In earlier European trade, the euro hit a 2-1/2 year high of $1.3915, its highest since October 2011. The euro has made broad based gains after the ECB on Thursday decided to stand pat on policy and held off from fresh monetary stimulus.
"The ECB was quite disappointing to a lot of euro bears," said Yujiro Gato, currency strategist at Nomura, London.
The euro's gains accelerated on Friday after data from the ECB showed banks were set to repay a big chunk of its emergency 3-year loans next week. That repayment to the ECB shrinks its balance sheet size at a time when both the Federal Reserve and the Bank of Japan are expanding theirs by buying bonds.
The repayment of loans leads to a drop in excess liquidity, a factor which saw money market rates rise and boost the euro's allure.
Overall, investors are turning increasingly bullish about the euro after President Mario Draghi told a news conference that economic conditions in the region did not require a shift in monetary policy.