FOREX-Dollar rises on higher-than-forecast ISM index

(Updates prices, adds quote and background)

NEW YORK, Feb 1 (Reuters) - The dollar rose on Friday after a report showing a U.S. manufacturing activity gauge for January was higher than expected, helping the U.S. currency recover after some soft labor market data earlier.

The dollar earlier hit a two-month low against the euro after a report showed the first contraction in the jobs market since August 2003, but dealers began to take profits on their bets against the greenback shortly afterward.

This accelerated after the Institute for Supply Management said its manufacturing index reflected expansion in the sector.

"All in all, it's a supportive report for both stocks and the dollar after the weak payrolls reading earlier this morning," said Matthew Strauss, currency strategist with RBC Capital Markets in Toronto.

The euro fell to $1.4823 <EUR=>, down 0.3 percent from late Thursday, sharply reversing course after touching a two-month high of $1.4952 earlier in the session, according to Reuters data.

The dollar rose to 106.50 yen <JPY=>, up 0.2 percent.

(Reporting by Kevin Plumberg, Editing by Chizu Nomiyama,)