* Euro drops to fresh 9-month low vs U.S. dollar
* Dollar index marks new 10-1/2 month peak
* Swedish crown, sterling jump after high PMI readings
* Greenback hits 3-month peak against Canadian dollar (Updates with U.S. data, New York trading, changes dateline, previous LONDON)
By Daniel Bases
NEW YORK, Aug 5 (Reuters) - The U.S. dollar extended a broad-based rally on Tuesday after stronger-than-expected economic data, including an 8-1/2 year high in the pace of services sector growth and a bigger-than-expected increase in factory orders.
Earlier, European service sector data was mixed, with growth across much of the euro zone although a drop in Italy underlined the fragile economic outlook for the region and built expectations the European Central Bank will pump yet more euros into the financial system in an effort to boost growth.
"Generally the dollar started off on a stronger footing this morning and certainly the strengthening of the data has helped that rally," said Brian Daingerfield, currency strategist at the Royal Bank of Scotland in Stamford, Connecticut.
The euro fell to a fresh nine-month low of $1.3359, down around 0.40 percent on the day. The U.S. dollar index, which measures the greenback against a basket of currencies made up of its largest trading partners, rose to a 10-1/2 month high of 81.626, a gain of 0.38 percent.
The Institute for Supply Management said its services index rose to 58.7 last month, the highest since December 2005, from 56.0 in June. The reading blew past economists' forecasts for 56.3, according to a Reuters survey. A reading above 50 indicates expansion in the sector.
The Commerce Department said on Tuesday new orders for manufactured goods increased 1.1 percent in June after a downwardly revised 0.6 percent decline in May.
While the Italian numbers were disappointing, a surprise bounce for equivalent numbers in Sweden and Britain drove the crown and the pound higher.
"The euro certainly has reacted negatively to the Italian numbers," said Neil Mellor, a strategist with Bank of New York Mellon in London, adding that the data out of Europe shows economic momentum is faltering.
Sweden has been symbolic of Europe's flirtation with very low inflation, or even falling prices, this year, but its services PMI for July shocked by surging to 60.1 points from 54.6 a month earlier. The euro fell against the Swedish currency, dropping 0.31 percent to 9.2114 crowns.
"The momentum has been good in Sweden in recent months and if inflation does begin to pick up as the Riksbank expects then we may get back to seeing some upward potential later this year," Citigroup strategist Josh O'Byrne said, adding that he viewed the crown as fairly valued at current levels against the euro and dollar.
Sterling gains against the greenback slipped after the U.S. data. The Bank of England monetary policy is not expected to change after its meeting concludes later this week.
Cable was up just 0.05 percent at $1.6871. The greenback hit a three-month high against the Canadian dollar of C$1.0968, up 0.51 percent. (Additional reporting by Patrick Graham in London, Ian Chua in Sydney and Masayuki Kitano in Singapore; Editing by Louise Ireland/Ruth Pitchford and Chris Reese)