Market News

Feb 3 (Reuters) - Sterling stumbled against the dollar on Friday after a much larger-then-expected jump in U.S. jobs growth lifted the dollar as it drove bets that the Federal Reserve could opt for a bigger interest rate hike next month.

The pound reversed earlier gains, falling as much as 1% on the day to a three-week low of $1.20. It was last down 0.8% at $1.21295.

The U.S. Labor Department's closely watched employment report showed nonfarm payrolls surged by 517,000 last month, blowing past expectations for an addition of 185,000 jobs.

"This (NFP) gives the Fed more fuel to continue hiking... further and for longer," said Brandon Pizzurro, director of public investments at Guidestone Capital Management in Texas.

Traders now price in a 90% chance of a 25-basis point hike from the Fed next month. A 25 bp hike earlier this week and subsequent commentary had spurred bets that the Fed could opt for smaller rises at upcoming meetings.

The dollar index , which measures the greenback against a basket of other major currencies, was last up 0.7%.

The pound extended losses against the euro as well, with the pair nudging up 0.1% to 0.89365 but holding close to four month lows hit on Thursday after the Bank of England's policy meeting. The BoE said UK inflation may have "turned a corner", signalling the central bank may be close to bringing its tightening cycle to an end.

The BoE delivered its 10th straight interest rate hike on Thursday, raising the key interest rate by 50 basis points to 4% - its highest level since 2008.

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The British currency was on track for a weekly loss of around 2.2% against the dollar, its biggest weekly decline in more than four months.

Euro-sterling headed for rise of 1.9% this week - the largest weekly gain for the euro in three months.

Reporting by Susan Mathew and Ankika Biswas; Editing by Toby Chopra, Kirsten Donovan