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NEW YORK (Reuters) – There is no sign that investors' headaches from Europe are going away, but early indications of strong holiday spending and an improving labor market could soothe Wall Street this week.

Fears that Europe's debt crisis could spiral out of control have pushed stocks off two-year highs hit earlier this month. Since November 5, the S&P has fallen 3.1 percent after running up 17 percent over the two months before that. At Friday's close, the S&P 500 was down 0.9 percent for the week, almost matching the Dow's 1 percent drop.

However, those fears have been countered by signs of a gathering recovery in the labor market at home. The government's nonfarm payrolls report on Friday is set to be another sign of a turnaround in hiring that could boost stocks through the end of the year.

Anecdotal evidence suggests holiday shopping got off to a good start. The S&P retail index (.RLX) rose more than 5 percent in the run up to "Black Friday," the day after Thanksgiving, when Americans traditionally take shopping malls by storm.

Retail stocks' gains are a sign of an increasingly bullish view of the U.S. consumer after a string of stronger indicators on jobs, sentiment and spending.

"The consumer is more confident and they are spending a bit more money, and I think retail as a whole is perking up," Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas said, adding that retail stocks "look relatively cheap to us, and I think sales are going to surprise to the upside."

Friday's payrolls report is expected to show the economy added 140,000 jobs in November, according to economists polled by Reuters. If that forecast is met, the jobs data will fit a pattern of growing strength in the labor market.

In October, companies hired at their fastest pace since April, the government's payrolls data showed, while the latest weekly initial claims for unemployment benefits have dropped to their lowest in over two years. November consumer sentiment rose to the highest level since June. October consumer spending also gained.

BLACK FRIDAY ANYTHING BUT BASIC

Early anecdotal evidence from Black Friday suggested shoppers were spending and that discounts were not as deep this year as last, potentially helping to lift retailers' margins as they look for the best holiday season in three years.

Black Friday marks the start of the holiday spending when U.S. retailers traditionally turn a profit, or go into the black for the year.

The National Retail Federation said that nearly 60 million Americans planned to hit the stores over the weekend, while another 78 million might join the crowds of shoppers. The NRF will provide an update later on Sunday.

Retailers on the front lines will publish same-store sales data on Thursday when they will likely comment on the weekend's events.

"It seems the American consumer is back with a vengeance," said Kim Caughey Forrest, a senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. "If we are to believe CEOs of retailers, they feel they can support margins with prices that are attracting consumers."

Shares of Amazon.com (AMZN.O), a favorite online retailer, have run up 12 percent since mid-November, and hit an all-time high of $177.25 in the middle of last week.

RUMORS OF THE EURO'S DEMISE

Europe's debt crisis could be the fly in the ointment, though. Pundits predicting the euro's demise are getting serious attention.

European Commission President Jose Manuel Barroso denied on Friday that a financial rescue plan was in the works for Portugal and called a newspaper's report that Portugal was under pressure to seek a bailout "absolutely false," while Spain said it did not need help to manage its finances. But the market was less sanguine and stocks took a nose dive.

The European Union on Sunday approved an 85 billion euro ($115 billion) rescue for Ireland, an EU source said, and was set to announce outlines of a permanent system to try to resolve Europe's spreading debt crisis.

Finance ministers from the 16-nation euro zone, anxious to prevent financial market contagion from engulfing Portugal and Spain, endorsed an emergency loan package to help Dublin cover bad bank debts and bridge a huge budget deficit.

All 27 EU finance ministers were expected to endorse the broad outlines of the longer-term plan before markets open in Asia Monday, the source said.

Kate Schapiro, who runs an international equity fund out of San Francisco, said the declines in European stocks last week had looked "really, really ugly."

Her fund owns the New York-listed stock of Spain's Banco Santander (STD.N), which fell 15 percent this past week.

Schapiro says Santander and other European stocks may be getting hit too hard and that strong companies are getting caught up in the general selling.

"At the end of the day," she said, "I think we are going to muddle through this, and this could be a buying opportunity -- that's my gut" feeling, she added.

S&P 500 ON FAMILIAR GROUND

Periods of decline in November have worked off the S&P 500's overbought condition. The index has been finding support at around 1,180 and resistance at 1,200. That may serve as a short-term trading range.

Manny Weintraub, president of Integre Advisors in New York, said low volume is likely to mark trading in the near term, keeping stocks in their recent range.

"We're entering a period with a lot of days of very weak volume," he said.

Bullish sentiment has been on the rise again, a factor that may worry contrarian investors who see bullishness as a "sell" signal.

Bullish sentiment rose 7.4 percentage points to 47.4 percent, according to the latest sentiment survey by the American Association of Individual Investors. Bullish sentiment has now spent 12 consecutive weeks above its historical average of 39 percent despite some drops in November.

(Reporting By Edward Krudy; Additional reporting by Rodrigo Campos; Editing by Jan Paschal)

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