The dollar was on the defensive and Japan stocks fell after weak U.S. jobless claims figures heightened worries that Friday's payroll data could paint a bleak picture of the U.S. economic recovery.

Growing worries about employment conditions in the United State are keeping investors on the sidelines ahead of the jobs data, in addition to concerns about U.S. consumer spending, said Fumiyuki Nakanishi, manager at SMBC Friend Securities.

Data overnight showed new U.S. claims for unemployment benefits unexpectedly rose last week to the highest level since early April, pushing stocks on Wall Street lower.

Japan's Nikkei <.N225> fell 0.3 percent as traders closed positions ahead of the weekend, but is poised to end the week slightly higher, supported by solid earnings from companies including Toyota Corp <7203.T>.

Strong corporate earnings have supported equity markets in recent weeks despite a string of disappointing U.S. data, but the quarterly reporting period is now nearing an end.

So far this year the Nikkei is down nearly 9 percent, hurt by worries that the global recovery is running out of steam and by a stronger yen, which is inching toward a 15-year high against the dollar.

The MSCI index of Asian stocks outside of Japan slipped 0.2 percent, but looked set to gain 2 percent on the week and is barely in positive territory for the year.

According to a Reuters poll, the U.S. Labor Department is expected to report at 8:30 a.m. EDT that nonfarm payrolls fell 65,000 last month after declining 125,000 in June, as temporary workers hired to conduct the decennial census were let go. Private sector payrolls are seen rising a modest 90,000 and the unemployment rate is expected to climb to 9.6 percent from 9.5 percent in June.

DOLLAR, BONDS

The dollar index <.DXY> stood at 80.80, easing slightly from late U.S. trade and near its Tuesday low of 80.469, its lowest since mid-April.

Its 14-day relative strength index is below 30, indicating a heavily oversold position. With the mood already so bearish, some traders believe a result anywhere close to forecasts would likely be a relief and could see the dollar rally.

Against the Japanese currency, the dollar traded at 85.82 yen, one yen above its November low of 84.82 yen, a break of which would take it to a 15-year low.

Further yen gains could stir talk of yen-selling intervention by Japanese authorities, though many market players think Tokyo is unlikely to pull the trigger at this time.

The market is focusing on the outlook for the U.S. economy. If the dollar breaks below the November low, it could enter a whole new world, said Minoru Shioiri, chief manager of forex trading at Mitsubishi UFJ Morgan Stanley Securities.

Japanese government bonds gave up early gains in jittery trade ahead of the U.S. data. The benchmark 10-year yield fell below 1 percent earlier in the week.

Gold edged up 30 cents to $1,193.40 an ounce and was on track for its biggest weekly gain since late June as the dollar remained mired near multi-week lows.

Crude oil futures were little changed near $82 a barrel.

U.S. wheat futures surged as much as 4.8 percent, after settling up at the permitted daily maximum for the first time in two years on Thursday, as Russia said it would temporarily halt grain shipments because of a drought cutting production.

(Additional reporting by Hideyuki Sano in TOKYO; Editing by Kim Coghill)

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