(Reuters) - Stock index futures rose modestly on Friday as investors cautiously awaited the latest employment report for further evidence the economy was on track to recovery.

Employment likely grew solidly last month, but the jobless rate probably rose from a 2-1/2 year low as improving conditions lured more Americans, who had given up looking for work, back into the labor market.

However, the pace of job creation likely remained too slow to signal a robust recovery was finally underway. Nonfarm payrolls rose 150,000 last month, according to a Reuters survey, after gaining 120,000 in November. The data is due at 8:30 a.m. EST.

Analysts say reports this week showing private employers added more jobs than expected in December and jobless claims fell have raised expectations. With Europe's sovereign debt crisis festering, investors need to see solid improvements in the labor market to continue the stock market rally.

If we get a good employment report, the stock market will not do anything because expectations have already built up, said Peter Cecchini, U.S. head of equity derivatives at Cantor Fitzgerald in New York.

If the report comes in at or below (consensus), the market will not like it.

S&P 500 futures rose 3.4 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures added 26 points, while Nasdaq 100 futures gained 5 points.

In company news, Alcoa Inc (AA.N), the largest U.S. producer of aluminum, will cut its global smelting capacity by 12 percent, becoming the first producer to take direct action to cut costs amid a steep drop in metal prices. The stock was down 2.1 percent at $9.16.

The euro hit 16-month lows against the dollar and sterling on Friday, and traded close to an 11-year trough versus the yen, with growing unease about funding pressures in the euro zone pointing to further declines. The single currency, which has been closely correlated with global equities.

Italian and Spanish government bond yields rose Friday and were expected to remain elevated as the sovereign debt at the heart of the euro zone crisis comes under pressure before auctions next week.

On top of that, German industry orders slumped in November by the most since the height of the financial crisis nearly three years ago, data showed Friday.

Intraday, equities volatility has been high and frequent as investors struggle between relatively strong U.S. economic data and the threat of Europe's debt crisis spilling over to the global economy.

Citigroup Inc's (C.N) efforts to sell its OneMain consumer lending unit to private equity buyers ended without a deal, the Wall Street Journal reported.

Banks led Wall Street higher Thursday, a sign investors are betting a relatively strong U.S. economy will help U.S. stocks outperform other markets.