* Euro gains may be unsustainable
* Dollar set to gain 2.5 pct vs yen in October -best since Feb
* Trading subdued ahead of non-farm payrolls
NEW YORK, Oct 31 (Reuters) - The euro drifted higher against the dollar and yen on Wednesday and posted its third straight month of gains, but uncertainty about the heavily indebted euro-zone economies could limit further strength. Gains in equity markets early in the day lifted the euro above $1.30, but momentum faded as Wall Street turned negative and uncertainty remained about how to keep Greece afloat and when Spain may ask for a bailout. ``We still don't see any reason to be buying the euro, especially above $1.30,'' said John Doyle, currency strategist at Tempus Consulting, in Washington. ``We're looking for optimism in (Greece and Portugal) and we still don't really see it going long term. We're waiting for Spain to act, and that hasn't happened.'' The euro was slightly higher against the dollar at $1.2959 , after hitting a session peak of $1.3021 on Reuters data, roughly a one-week high. The euro posted a gain of 0.9 percent this month. Trading was subdued, with many traders sidelined ahead of the U.S. non-farm payrolls report for October. It could take several sessions for U.S. trading to get back to normal levels after a massive storm closed markets for two consecutive days to begin the week. Ahead of Friday's comprehensive look at the U.S. job market, investors on Thursday will look to the all-important ISM index of national manufacturing conditions, seen holding above 50 for a second straight month in October. That would suggest an expansion. Against the yen, the euro climbed 0.2 percent to 103.40 yen . The euro posted a 3.2 percent gain this month, its best monthly performance against the currency since June. Euro-zone ministers received more bad news on Wednesday when Athens more than halved its forecast for a budget surplus before debt-servicing costs next year, dimming one of its few bright spots as rounds of austerity deepen a recession already into its fifth year. Greece needs to push through spending cuts and tax measures worth 13.5 billion euros ($17.5 billion) as well as a raft of economic reforms to appease EU and IMF lenders and secure bailout money to avoid bankruptcy. In Spain, Prime Minister Mariano Rajoy does not see an urgent need to seek a rescue for government finances, a government source told Reuters on Wednesday. ``He has spent nearly three months avoiding a decision, which has frustrated euro officials,'' said Sean Cotton, foreign exchange adviser at Bank of the West in San Ramon, California. A Spanish bailout is widely seen as a positive step for Europe because it would activate the European Central Bank's bond-buying program aimed at lowering borrowing costs for indebted countries.
JOBS DATA AHEAD Insurance payouts in the wake of monstrous storm Sandy could weigh on the dollar, although a rise in domestic demand for repair work could boost it. Investors' focus began to shift to Friday's U.S. jobs report for October, which comes days before the presidential election. ``The market has to price in quite a few variables - weaker earnings, the aftermath of Sandy, nonfarm payrolls and the U.S. elections,'' said Dean Popplewell, senior currency strategist at OANDA in Toronto. The Labor Department said it will release the October jobs data on Friday at 8:30 a.m. (1230 GMT), as scheduled, even though the storm forced the government to shut down for two days. Employers are expected to have added 125,000 jobs to their payrolls in October, up from 114,000 in September, according to a Reuters survey of economists. The unemployment rate is forecast to tick up a tenth of a percentage point to 7.9 percent after a dramatic 0.3 percentage point fall in September. Against the Swiss franc, the euro hit a three-week low of 1.2065 francs on trading platform EBS, with some market players citing increased repatriation flows from deleveraging by Swiss Bank UBS, which cut 10,000 jobs this week. The Swiss National Bank cut its holdings of euros to 49 percent in the third quarter from 60.1 percent in the second, data showed on Wednesday. The dollar was up 0.3 percent at 79.86 yen, recovering from a fall to 79.25 yen on Tuesday. For the month of October, the dollar posted a gain of 2.4 percent against the yen - the best monthly performance since February.