(Reuters) - The euro hovered near a 16-month low against the dollar and an 11-year low versus the Japanese yen on Friday, with further declines seen in store for the embattled single currency.

As worries about the euro zone debt crisis remain unabated, the single currency looked set to end the first week of 2012 near a record low against the Australian dollar and a 16-month trough versus sterling.

Market players said little relief was in sight for the euro, with next week's Italian and Spanish government bond sales likely to keep the market on edge and the euro under pressure.

Even a meeting between France's Nicolas Sarkozy and German Chancellor Angela Merkel on Monday may not produce much euro positive news, said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.

Media reports have said that discussions at the Sarkozy-Merkel meeting will focus on the issue of enforcing budget discipline. But I don't think that's what the market is looking for, Karakama said.

I hope we see the type of discussions that provide assurances on the effectiveness of the ESM, he said, referring to the euro zone's permanent rescue fund, the European Stability Mechanism.

The euro could rise sharply on short-covering if a decision is reached at some point to increase the firepower of the ESM, but the single currency is likely to remain under pressure until then, Karakama said.

It may take a few months to reach such a decision, with French Prime Minister Francois Fillon having said on Thursday that a March summit of European Union leaders will discuss increasing the clout of the ESM. [ID:nP6E7NE001]

The euro held steady at $1.2794, just barely above a low of $1.2770 hit on Thursday on trading platform EBS, which was its lowest level since September 2010.

One support area for the euro is seen around $1.2600, the 76.4 percent retracement of the June 2010 to May 2011 rally.

U.S. JOBS DATA

The euro has come under heavy selling pressure in the past few days, with offers overpowering large-lot bids that had been placed at levels above $1.30 and near $1.29, said a trader for a Japanese brokerage house in Tokyo.

Both European real money investors and hedge funds were selling (the euro) in pretty large amounts, he said.

There are option barriers at $1.2750, $1.2700 and $1.2650, as well as a large barrier at 98.00 yen, the trader said, adding that the market may start aiming for such levels.

In the near-term the euro may target $1.25 and after that $1.20, that is now sort of the market consensus, he said.

Against the yen, the euro held steady at 98.73 yen, just above an 11-year low of 98.451 yen hit on Thursday.

About the only thing that might give the euro a lift right is short-covering, said Mizuho Corporate Bank's Karakama, adding that Japanese investors, if anything, may still have some euro denominated assets that they want to sell.

I think we need to keep in mind the possibility of fund repatriation by Japanese players. It's not nearly a situation where they can take on risk, Karakama said, adding that the euro may drop to as low as 93 yen during 2012.

Against the Australian dollar, the euro stood at A$1.2469, near a record low of A$1.2438 hit on Thursday. Against sterling, the euro stood at 82.545 pence, near a 16-month low of 82.495 pence struck on Thursday.

One near-term focal point is U.S. jobs data due later on Friday, after a measure of U.S. private-sector hiring surged in December.

The safe haven dollar has often come under pressure when economic data bolsters optimism about U.S. and global growth and gives a boost to risk-sensitive currencies and assets.

But with investors preoccupied with the euro zone's debt crisis, even a strong reading from U.S. jobs data is unlikely to spur aggressive moves toward risk-taking or dollar-selling, market players said.

In the past, that would have helped trigger buy backs in the euro, said Mizuho Corporate Bank's Karakama.

As things stand now, it looks like nonfarm payrolls will probably be strong but my sense is that we won't see active buy backs in the euro even if that happens, he said.

The dollar stood at 80.878 .DXY versus a basket of currencies, hovering near a peak of 81.016 hit on Thursday, the highest level for the dollar index in about a year.

(Additional reporting by Ian Chua in Sydney; Editing by Kim Coghill)