* Pound storms past $1.60 for first time since mid-May * Weak U.S. non-farm payrolls number pushes dollar lower * UK industrial output grows at fastest pace in 25 years By Anirban Nag LONDON, Sept 7 (Reuters) - Sterling hit a four-month high against a weak dollar on Friday after U.S. government jobs data disappointed the market and bolstered speculation that the Federal Reserve will ease monetary policy. But the pound dropped to its lowest in two months against the euro as confidence in the single currency revived after the European Central Bank unveiled a plan to bring down the borrowing costs of struggling peripheral euro zone countries. The euro zone is the UK's biggest trading partner and any easing of the debt crisis is seen as positive for sterling, especially against the dollar. ECB President Mario Draghi announced on Thursday that the bank would undertake unlimited, short-dated bond purchases under strict conditions to ease funding pressures on governments that sought help. The pound rose to a four-month high of $1.6010, rising past option barriers at $1.6000 and rallying in line with the euro after the U.S. data. It was also bolstered after Spanish 10-year borrowing costs fell below 6 percent for the first time since May. "The more the dollar weakens, the more chances sterling/dollar will remain above $1.60," said John Hardy, currency strategist at Saxo Bank. "The unemployment numbers have weighed down on the dollar and given a lift to stocks and risk." Nonfarm payrolls increased only 96,000 last month, U.S. government data showed on Friday. The unemployment rate dropped to 8.1 percent from 8.3 percent in July but this was largely due to Americans giving up the search for work. The pound edged lower against a broadly stronger euro, with the shared currency up 0.6 percent on the day at 79.74 pence. The euro rose to 79.94 pence, its highest level since early July. Traders said a decisive break of its 100-day moving average of 79.77 could see it rise to 80 pence in the near term. The euro firmed across the board, hitting a near four-month high against the dollar, a two-month peak against the yen and an eight-month high against the safe-haven Swiss franc as ECB President Mario Draghi's plan to stem the debt crisis was cheered by most. "The world has been in a pretty grim place for the last three months and this plan is something that offers a firewall," said Gavin Friend, currency analyst at National Australia Bank. Sterling barely reacted to UK industrial and manufacturing data, which showed that total industrial sector output rose strongly in July, more than reversing the fall in output in June. The drop in June was driven by the extra bank holidays related to the Queen's Jubilee. The data topped off a week when services and manufacturing sector PMI surveys showed activity in the UK was not as gloomy as many had forecast and the economy could emerge from a recession in the coming quarters. That will cement expectations that the Bank of England is unlikely to ease monetary policy at least for the next two months.

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