* Spanish yields rise, weigh on euro * US jobless claims fall to lowest in more than 5 years * BoE keeps rates steady, supports sterling By Julie Haviv NEW YORK, May 9 (Reuters) - The dollar catapulted to its highest level against the yen in over four years on Thursday as an upbeat U.S. jobless claims report suggested a stabilizing labor market in the world's largest economy. The dollar, up a whopping 16 percent against the Japanese currency so far this year, started climbing earlier in the North American session after data showed initial claims for state unemployment benefits fell to its lowest level since January 2008. Dollar gains accelerated in the early afternoon as options barriers strongly defended over the past month were taken out. Currency investors also chose to fund purchases of emerging market currencies by selling the yen, a trader said. "Defense of the 100-yen barrier was weak this time around, so traders took advantage and zoomed ahead," said Sebastien Galy, currency strategist at Societe Generale in New York. "We see further upside in dollar/yen now that that barrier is gone," he said. The dollar rallied to 100.66 yen, its highest since April 2009. It last traded at 100.58 yen, up 1.6 percent on the day and its biggest one-day gain in a month, according to Reuters data. The state of the U.S. jobs market is a key factor for the Federal Reserve. The central bank may opt to taper its $85 billion a month in bond purchases should the labor market show sustained and broad improvement. The Bank of Japan, on the other hand, last month announced plans to buy $1.4 trillion in bonds to buoy its deflation-prone 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 that caught the market's attention earlier in the session, especially as it came on the heels of a robust U.S. non-farm payrolls report last Friday, "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. 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 a session low of $1.3057, failing to build on gains made after robust industrial data from Germany this week. It was last at $1.3058, down 0.7 percent on the day. Against the yen, the euro last traded 0.8 percent higher at 131.20. "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 follows 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.