FOREX-Dollar slumps ahead of key US payrolls report

* Dollar falls as market braces for weak U.S. payrolls data

* Yen rises as falling stocks dampens risk appetite

* Sterling bounces as BoE delivers 50 bps rate cut (Adds quotes, updates prices, changes byline)

By Wanfeng Zhou

NEW YORK, Jan 8 (Reuters) - The dollar fell against a basket of currencies on Thursday ahead of a government report expected to show the U.S. economy lost more than half a million jobs in December for the second month in a row.

The Japanese yen traded broadly higher as falling global stocks and weak sales at top U.S. retailer Wal-Mart tempered the market's appetite for risk and heightened fears about the global economic outlook.

Worries about the U.S. labor market took center stage after an ADP survey earlier this week pointed to steep job losses in the private sector. Weekly jobless claims data showing the number of Americans on the unemployment rolls rising to a 26-year high further dampened demand for the greenback.

"There's definitely the worry about the jobs data tomorrow," said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto. "Expectations are geared for a fairly ugly number despite the fact that the weekly initial claims data was not as bad as it could have been."

In late trading in New York, the ICE Futures U.S. dollar index .DXY, which tracks the value of the greenback against a basket of six currencies, fell 0.7 percent to 81.495.

The dollar was down 1.6 percent at 91.16 yen JPY=, extending losses after Wal-Mart Stores Inc (WMT.N) -- the world's largest retailer -- posted weaker-than-expected December sales and cut its profit forecast. For full story, see [ID:nN08485027]

"The Wal-Mart news is negative for the overall economy and certainly a negative for stocks, and this has short-circuited the dollar's New Year rally," said Brian Dolan, chief currency strategist, at Forex.com in Bedminster, New Jersey.

The dollar had rallied in the first few days of 2009, buoyed by a planned U.S. stimulus package that many hope would help pull the economy out of recession. But that optimism proved short-lived as fresh U.S. data and dismal earnings figures reignited fears of a prolonged slowdown.

Following Wednesday's grim ADP report, which showed private-sector job cuts of 693,000, economists have revised downward their forecasts for U.S. nonfarm payrolls in December to show job losses of 550,000, from an original estimate of 500,000, according to a Reuters poll.

"The dollar is looking vulnerable with all the bad economic numbers we're seeing such as rising unemployment," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "Some are saying we could get a shocker (in payrolls). Some people are talking about 1 million job losses for December."

YEN, STERLING ADVANCE

The euro rose 0.6 percent to $1.3718 EUR= after falling to a session low of $1.3535, according to Reuters data.