* Euro falls vs dlr; weak German manufacturing orders weigh
* Trade volumes thin ahead of U.S non-farm payroll data
* Weak payrolls may spur risk aversion, further boosting dlr (Changes byline, adds comment, updates throughout)
By Harpreet Bhal
LONDON, Dec 5 (Reuters) - The euro fell against the dollar on Friday on growing risk aversion ahead of U.S. employment figures, which are expected to show a sharp decline as the global economic downturn intensifies.
The euro was on the back foot after German October manufacturing orders posted a surprising fall of 6.1 percent on the month, while falling share prices in Europe also weighed on the single currency.
The U.S. currency gained traction, pushing the dollar index up 0.5 percent to 87.030 as investors dropped risky positions ahead of U.S non-farm payrolls for November due at 1330 GMT, which are forecast to fall by 340,000.
Expectations point towards the biggest monthly drop in non-farm jobs in more than two decades, adding to the view that the U.S economy is slowing sharply.
"We expect the numbers to be grim. With job losses steadily mounting you would question corporate earnings next year and there would be more pressure on carmakers because people without jobs wouldn't be buying them," said Tom Vosa, head of market economics at nabCapital in London.
By 1208 GMT, the euro fell 0.7 percent to $1.2675, while the dollar rose 0.1 percent to 92.23 yen.
The single European currency came under selling pressure as regional shares fell more than 2.0 percent.
Concerns over the health of the global economy have battered stock markets and other asset classes deemed risky, causing investors to drop higher-yielding currencies such as the euro, sterling and the Australian and New Zealand dollars in favour of the U.S currency and the low-yielding yen.
While analysts say that a dire U.S. jobs reading could be seen as dollar-negative on the view that it would reinforce the bleak economic outlook, some added that weak data could further spur risk aversion, pushing the U.S. currency higher.
"If we do see equity markets coming off sharply (after the U.S jobs data) and it turns into a global equity markets sell off, then we could well see currencies coming back under pressure against the dollar, so it could actually be a dollar-positive," said Ian Stannard, senior foreign exchange strategist at BNP Paribas in London.
Sterling rose marginally against the dollar to $1.4684 as some traders covered short positions in the currency, after it hit a near-seven-year low on Thursday.
But the UK currency remained weak, hovering close to record lows against the euro, after the Bank of England cut interest rates by 100 basis points to 2 percent on Thursday.
The European Central bank also cut rates on Thursday, slicing 75 basis points from its benchmark rate to 2.5 percent.
Even after Thursday's big rate cuts, market participants believe that the interest rates of major countries around the world have more room to fall.
This would shrink their spreads against the Federal Reserve's 1.0 percent rate and Japan's 0.3 percent, which are seen keeping the dollar and the yen supported in the longer term.
Despite a spate of rate cuts this week, the gloom surrounding the global economy continues to linger. Data from the OECD showed the outlook for the world's leading economies has weakened further, with significant deterioration in the prospects for China, India and Russia. (Additional reporting by Naomi Tajitsu) (Reporting by Harpreet Bhal; Editing by Victoria Main)