* Soft U.S. non-farm payrolls figure weighs on dollar * Yen selloff continues, pressured by BoJ stimulus * Dollar on track to rise toward 100-yen mark * Mexico's peso rallies to 19-month peak vs dollar By Daniel Bases and Gertrude Chavez-Dreyfuss NEW YORK, April 5 (Reuters) - The dollar dropped to a two-week low against the euro, as worse-than-expected U.S. jobs data for March raised concerns that the pace of recovery in the American labor market has slowed. Japan's yen also extended its downward slide, hitting its worst levels against the dollar since June 2009 and a two-month trough against the euro. As trading volumes dried up heading into the weekend, the euro at one point was up more than 2 percent on the Japanese currency. Investors continued to dump the yen in the aftermath of the Bank of Japan's massive stimulus announcement on Thursday, which should keep its downward trend intact. The yen fell 3.4 percent this week against the dollar, its worst week since December 2009. Against the euro, the yen slid 4.95 percent, its worst weekly performance since November 2008. But the weak U.S. jobs number was the market's focus on Friday. The employment report along with downbeat economic indicators in the manufacturing and service sectors earlier this week should ensure that the Federal Reserve's quantitative easing policy will be in place for some time, analysts said. "It is likely the debate about QE tapering will be put on the back burner for now as employment gains look to be losing momentum," currency analysts at FOREX.com wrote on Friday. Under QE, the central bank floods the market with cash through asset purchases, boosting the supply of the currency and therefore, weakening it. While that may theoretically weaken the dollar, some portfolio managers said this is not a reason to abandon the greenback just yet. "This data interrupts the strong dollar trend against the euro for example, but medium-term, I am not convinced that this weakness in the dollar will continue," said Federico Garcia Zamora, director of currency strategies and senior portfolio manager at Standish Asset Management in Boston. Standish manages $167 billion in assets. "We had expected some softness in the jobs data; after all, recent reports had been printing weaker-than-expected numbers. But this is a minor pullback in the U.S. economy and we're going to see a slowdown in the next couple of quarters and then we will see growth picking up again in the last quarter of the year," Zamora added. U.S. Labor Department data showed that the economy added just 88,000 non-farm jobs last month, well below the consensus forecast for a gain of 200,000. In a separate survey, the unemployment rate inched lower to 7.6 percent from 7.7 percent the previous month, while January and February readings were revised upward to show that 61,000 more jobs were added. On Friday, the euro rose as high as $1.3039 - its strongest level since March 25. In late New York trade, the euro changed hands at $1.2998, up 0.49 percent on the day and up 1.4 percent this week - its best weekly showing since mid-January. "The 61,000 additional jobs (for January-February) were not sufficient offsets," said Marc Chandler, global head of foreign exchange strategy at Brown Brothers Harriman in New York. "Investors have also become more immune to the divergence with the unemployment rate. The unemployment rate ticked down ... as almost 500,000 people left the labor market." Against the yen, the dollar traded up 1.29 percent at 97.57 yen, just off the near four-year high of 97.83 in thin afternoon trade. This marked a sharp rebound from the 95.80 yen session low hit just after the U.S. jobs report. Analysts said the main driver for the dollar's moves against the yen is still the BoJ's monetary stimulus as the greenback was on track to hit the psychological 100-yen threshold. "Investors' mindset in trading dollar/yen is to buy it on dips," said Brian Daingerfield, currency strategist, at RBS Securities in Stamford, Connecticut. "We know that dollar/yen will continue to strengthen given what's going on in Japan and the U.S. payrolls report gave the market the perfect opportunity to buy it back at a lower level," he added. Overall, the greenback was up 12.6 percent against the yen so far this year. The euro settled around 126.85 yen, a gain of 1.8 percent on the day after having hit a peak of 127.29 yen, the best showing since early February. Also on Friday, the Mexican peso rose to a 19-month high against the dollar on market speculation of an upgrade to the country's sovereign credit rating. The ratings agencies, as a practice, do not comment on market rumors. The peso firmed almost 1 percent to 12.1931 per dollar, breaking past the key 12.20 level to hit its strongest since August 2011. Investors are more optimistic on Mexico given the new government's economic reform plans and close proximity to a strengthening U.S. economy, notwithstanding Friday's dismal jobs report.