* Euro dips vs dollar after surge on Friday * Market players start to question EU summit deal * PMI data confirms euro zone manufacturing slowdown By Nia Williams LONDON, July 2 (Reuters) - The euro dipped against the dollar on Monday, giving up some ground after staging its biggest one-day rally in eight months last week, as initial euphoria sparked by a summit deal to tackle the euro zone crisis lost some of its lustre. The common currency surged around 1.7 percent on Friday, its biggest one-day percentage gain since last October, after leaders agreed to let Europe's rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states. The EU leaders also took a step towards banking union by pledging to create a single banking supervisor. While some market players said the euro's rally may continue for a while longer, others questioned its sustainability, especially if peripheral bond yields start to climb back towards recent euro-era highs. "The optimism will fade as the week unfolds and if yields in Italy and Spain increase there will be further pressure on euro/dollar," said Lutz Karpowitz, FX strategist at Commerzbank. "It (the deal) is just spending more money from donor countries and receiving more money from debt-ridden countries. This will lead to political friction and is not a long-term solution." The euro fell 0.2 percent to $1.2632, down from a one-week high of $1.2693 hit on trading platform EBS on Friday. Market players cited supporting bids from Asian investors around $1.2590-95. The common currency slipped 0.4 percent against the yen to 100.55 yen. On Friday the euro had jumped 2.2 percent versus the yen, its biggest one-day rise since March 2011. T h ere was talk of profit-taking in the euro against the yen by hedge funds, traders said. JP Morgan analysts noted that in previous weeks, a market-friendly election result in Greece and a bailout for Spanish banks provided less than a day's worth of rally for riskier assets including the euro. "This one should last a bit longer, as it achieved a lot more, but will likely over the next month run into resistance from weak economic data and some back-sliding on the EMU summit as officials haggle over the details," they wrote in a note. ECB EYED Euro zone manufacturing suffered in June and jobs were cut at the fastest rate in two-and-a-half years, PMI surveys showed on Monday. The gloomy data added to expectations the European Central Banks will cut interest rates on Thursday, a move that could weigh on the euro. A Reuters survey showed market expectations were for a 25 basis point cut to 0.75 percent. "If we see a rate cut on Thursday it will certainly be euro-negative in my view," said Gareth Berry, associate director of G10 FX strategy for UBS in Singapore, who expected the euro to trade at $1.15 by the end of the year. Investors who trade using models based on interest rate differentials would likely spring into action, he said. "They will be extremely active in the immediate aftermath of a rate cut and we'd expect them to be heavy euro sellers." Commodity currencies recovered from data on Sunday showing Chinese factory activity slowed to seven-month lows in June, with the outcome not as bad as feared. The Australian dollar was last up 0.1 percent at US$1.0240, holding gains made on Friday when it surged 2.1 percent for its biggest one-day jump in seven months. The yen showed little reaction to news that Japanese political heavyweight Ichiro Ozawa and 51 other lawmakers will quit the ruling party over a plan to increase sales tax. The government will still retain its majority in the powerful lower house of parliament and the currency appeared to shrug off concerns over political uncertainty. The dollar dipped 0.2 percent to 79.62 yen, staying below a two-month high of 80.63 yen hit a week ago.