* Dollar near 8-month trough on U.S. government deadlock
* Prolonged U.S. government shutdown could postpone Fed tapering
* Euro trades near 8-month high, sees minor setbacks
By Anooja Debnath
LONDON, Oct 4 (Reuters) - The dollar traded near an eight-month low on Friday as the U.S. government shutdown dragged on, while the euro held near its highest level since February after a run of supportive economic data.
The U.S. currency was on track for its fourth consecutive week of losses against a basket of currencies. Its index was marginally up by 0.2 percent at 79.910, but still close to Thursday's trough of 79.627, its lowest in eight months.
The euro was down 0.2 percent at $1.3595, having touched a peak of $1.36465 on Thursday, its highest since February when it scaled this year's high of $1.3711. It has risen 0.5 percent on the dollar so far this week.
Analysts predicted minor setbacks and some consolidation for the euro going into the weekend after its recent ascent. Real money accounts were cited as main sellers of the pair taking it below the $1.3600 mark.
The dollar saw little respite this week with markets concerned that the U.S. impasse would merge with a more complex fight over raising the U.S. debt limit later this month. Failure to do so may lead to a historic debt default.
Adding to the greenback's woes was data on Thursday that showed growth in the U.S. service sector had cooled last month.
"No one wants to touch the dollar while we have uncertainties regarding the U.S. government shutdown. We also had a disappointing service sector number and that also added to the negative dollar sentiment," said Niels Christensen, FX strategist at Nordea.
U.S. Labour Department on Thursday said the employment report for September will not be released as scheduled on Friday due to the government shutdown. No new date was set.
Thus, any confirmation of an improving labour market that the Federal Reserve wants to see before cutting its stimulus, will likely be delayed, hurting the dollar. Two senior Fed officials said monetary policy was being kept easier to help offset the harm caused by political fighting.
"Those who have been expecting (Fed tapering) in October should be having a bit of panic now. Those who have bet on December may be worried too," said Katsunori Kitakura, associate manager of market making at Sumitomo Mitsui Trust Bank.
The dollar's weakness helped support the euro.
The resolution of Italy's latest political crisis, the European Central Bank refraining from any immediate policy action to help the economy and this week's data all supported the euro.
But Sara Yates, global currency strategist at JPMorgan Private Bank said the prospect of the Fed eventually trimming its bond purchase programme could push the benchmark U.S. 10-year Treasury yields to 3.0 percent or higher next year and support the dollar.
At the same time "sentiment towards Europe will likely improve but the ECB will stand ready to ease policy to stop financial conditions from tightening too much," she said, adding in such a case the euro could target the $1.28 mark.
The dollar was flat against the yen at 97.19 yen after the Bank of Japan kept rates on hold as was widely expected.