LONDON (AFX) - The euro lost further ground in midday trade despite encouraging PMI data, as worries about the state of the German labour market took hold, dealers said. There was also further profit-taking ahead of crucial US non-farm payroll numbers this afternoon, dealers said. Worries about German unemployment hit the euro hard, with leaks in the German media suggesting a 40,000 increase in December's month-on-month seasonally-adjusted unemployment. "That is a big disappointment, especially as the Labour Office is trying to take out the over 58s," said Hans Redeker, chief currency strategist at BNP Paribas. "The labour market is even more bleak than anticipated." Economists have been expecting a 20,000 increase in German unemployment numbers, which are released on Wednesday morning. These unemployment concerns swamped hopes that the euro zone economy was in fact improving. PMI data across the euro zone helped the currency bounce back from the 0.8970 usd level. The French and Italian surveys were above the 50 point cut-off that indicates expansion and the German number was markedly improved. The wider euro zone was also encouraging at 49.2, dealers said. Traders are also positioning themselves ahead of the US non-farm payroll numbers at 1.30 pm. These are expected to show a decline of 150,000 and anything substantially more than 200,000 is likely to hurt the dollar, said Russell Jones, a currency strategist at Lehman Brothers. Sterling is also in focus this morning following cautious comments from Eddie George, governor of the Bank of the England, and new doubts about the Treasury's five economic tests over UK entry into the euro. George warned last night that interest rates may have to be raised to moderate consumer demand. Two pieces of data yesterday revealed the continued optimism of the British consumer. Both the housing market and retail spending remain buoyant, the Nationwide and the Confederation of British Industry said respectively. Meanwhile, newspaper reports this morning say that Gus O'Donnell, a leading Treasury official, told a government seminar last November that the decision to join the euro will ultimately be a political one and the government's five tests for entry cannot be clearly and unambiguously met. Rob Hayward, a currency strategist at ABN Amro, thinks sterling should regain some ground. "There is a somewhat more circumspect view about EMU entry," said Hayward, which could see sterling test the 0.62 level against the euro.