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LONDON July 5 (Reuters) - Sterling hovered near a two-month high against a broadly weak dollar on Monday, supported by the view that the possibility of deeper-than-expected UK spending cuts will help to reduce the country's budget deficit.

The pound was also supported against the dollar after a tepid reading of U.S. employment late last week raised more concerns the country's economic recovery has stalled.

Investors awaited a reading of the UK services sector due at 0828 GMT. Forecasts are for the CIPS/Markit Services PMI to show a reading of 55.00 in June, down slightly from 55.40 in May.

The UK government defended plans on Sunday to ask government departments to consider cuts of as much as 40 percent after opponents warned that it could trigger a second recession and a wave of strikes.

UK Transport Secretary Philip Hammond said departments were unlikely to be asked to make the full extent of cuts they are being asked to consider.

By 0739 GMT, sterling GBP was little changed on the day at $1.5176. It hovered near $1.5230 hit on Friday, its strongest since early May. Trade was quite in the early London session, as U.S. markets will be closed on Monday for a public holiday.

The pound also has been supported by gains in the euro against the dollar, as concerns about the health of the U.S. economy has triggered short covering in the single European currency.

The euro EURGBP was flat on the day at 82.57 pence, pulling further away from 80.67 pence hit nearly a week ago, its weakest since November 2008.

The dollar struggled after a drop in U.S. non-farm payrolls on Friday suggested the U.S. economic recovery may be faltering, raising speculation that more fiscal stimulus may be needed even as other countries eye consolidation.

Analysts said the view that drastic measures to improve the country's finances would help to support sterling against the dollar in the longer term, although this would also depend on the economic impact of such efforts.

"The UK has taken a clear position in the dispute between Europe and the U.S. on the issue of how damaging consolidation measures will be for the first green shoots of the recovery," analysts at Commerzbank said in a note.

"Long term, the positive effects for sterling are clearly going to dominate. Only in case of weak economic data over the coming quarters fears could take hold that the government really has overdone it." (Reporting by Naomi Tajitsu, editing by Mike Peacock)