* Spanish yields rise, weigh on euro * US jobless claims fall to lowest in more than 5 years * BoE keeps rates steady, supports sterling By Gertrude Chavez-Dreyfuss NEW YORK, May 9 The dollar rallied across the board on Thursday, bolstered by an upbeat U.S. jobless claims report that suggested a stabilizing labor market in the world's largest economy. The euro, meanwhile, faltered against the dollar after two days of gains, pressured partly by a weaker-than-expected Spanish debt auction, which served as a reminder to investors that the outlook for the euro zone's weaker nations remained uncertain. But it was U.S. economic data and the dollar that caught the market's attention. On the heels of a robust U.S. non-farm payrolls report last Friday, initial claims for state unemployment benefits fell to its lowest level since January 2008, the Labor Department said on Thursday. The claims dropped 4,000 to a seasonally adjusted 323,000. Economists polled by Reuters had expected first-time applications to rise to 335,000 last week. "The report reinforced expectations that the U.S. economy remains best placed to begin gaining traction in its recovery efforts compared to counterparts (in the developed world)," said Samarjit Shankar, director of market strategy, at BNY Mellon in Boston. He cited dollar buying over the last five days that was almost twice as strong as the average greenback inflows seen over the past year. In midday trading, the dollar index rose 0.4 percent to 82.199, while the greenback climbed 0.3 percent to 99.31 yen after trading in negative territory earlier in the global session. Kathy Lien, managing director, at BK Asset Management in New York, said the jobless claims report will keep discussions alive about winding down asset purchases by the Federal Reserve. "That should help the dollar at a time when other major central banks are actively weakening their currency through lower interest rates or currency intervention," she said. EURO STUMBLES The euro fell to session lows of $1.3083, failing to build on gains made after robust industrial data from Germany this week. It was last at $1.3103, down 0.4 percent on the day. Against the yen, the euro slipped 0.1 percent to 130.11 . "Not aiding the euro was a softer-than-expected Spanish issue. Dealers ended up owning quite a bit of it, which suggested that there was weaker demand," said Dean Popplewell, chief currency strategist at OANDA in Toronto. "That has prompted the euro to back away from its highs." Spain's borrowing costs also rose on Thursday to 4.19 percent on speculation the country was planning a syndicated deal in the near future, suggesting there would be a lot of supply in a short period of time. Spanish yields have risen in four of the last five sessions. Investors also looked to book profits in Europe's shared currency after it rose for two straight days. Market participants were unwilling to hold euros for a longer period given the threat of more monetary easing from the European Central Bank, a move that should further erode yields on bonds issued by euro zone sovereigns. Bundesbank chief Jens Weidmann on Thursday said the ECB is still able to take policy action to address the euro zone crisis even after cutting its main interest rate last week, a German newspaper reported. This follow remarks from ECB policymakers Yves Mersch and Joerg Asmussen, who said on Wednesday the central bank still had room to maneuver on interest rates should the euro zone economy continue to weaken. The ECB cut its main rate to 0.5 percent last Thursday. While German industrial data this week beat expectations, overall economic activity across most of the euro zone remains sluggish, keeping alive expectations the ECB may act again soon. The single currency also lost ground against the British pound after the Bank of England kept interest rates on hold and left its asset buying programme unchanged. The euro last traded at 84.50 pence, down 0.2 percent. Sterling rose to a session high of $1.5586 against the dollar after the BoE decision, from $1.5568 beforehand. But it was last at $1.5502, down 0.2 percent, hurt by the dollar's overall strength. The euro also fell against the Australian and New Zealand dollars , which were buoyed by better-than-expected jobs numbers. Both currencies rebounded from lows struck after their central banks moved this week to tame their strength.