Australian dollar set to end year sharply lower vs USD, euro & pound

* Aussie on track for 14 pct annual drop vs USD

* Pound to show largest annual jump since 1991 vs AUD

* NZD outperforms with 1 pct gain vs USD in 2013

* China PMI due New Year's day

By Cecile Lefort and Naomi Tajitsu

SYDNEY/WELLINGTON, Dec 31 (Reuters) - The Australian dollar held above 3-1/2-year lows in a shortened session on Tuesday ahead of the New Year's Day holiday, but was still on track to record its first annual decline since 2008.

The Aussie AUD=D4 edged up to $0.8907, from a low of $0.8824 on Monday, but still very near a recent trough of $0.8820. A break below that would target $0.8770.

The Aussie looked set to finish 14 percent lower this year, having fallen from a peak near $1.0600 in April.

Much of the drop was due to a stronger U.S. dollar on expectations of an improving economic outlook there, coupled with a verbal campaign for a lower currency by the Reserve Bank of Australia (RBA).

The next flash point will come from China, which is due to release figures on manufacturing activity on New Year's day.

ECONCN . A Reuters poll showed a reading of 51.2 in December, down a touch from November's 51.4, suggesting the economy is on a stabilising path. News Search ID:nL3N0K3152

China is Australia's top export market.

"The general consensus view is small moderation in PMI and anything either side will generate some reaction," said Su-Lin Ong, senior economist at RBC Capital Markets.

"The Aussie is probably more vulnerable to downside risks because it's been under pressure," Ong said, adding thinned trading conditions could see a sharp reaction.

The Aussie was hovering near multi-year lows against the euro and pound, with the common currency showing an eye-watering gain of 22 percent this year for its biggest annual jump on record. It was last at A$1.5472 EURAUD=R , having climbed to the highest since 2010 near A$1.5600.

The euro has been a stand out performer of late as investors repatriate funds ahead of year-end. Also helping is Europe's colossal current account surplus, which brings a steady and sizable demand for euros from exporters.

The pound rose 18 percent so far this year against the Aussie to show its biggest jump in more than two decades.

The New Zealand dollar NZD=D4 traded at $0.8211, having bounced from a one-month low of $0.8119. The kiwi enjoyed technical support at $0.8201, its 100-day moving average.

The kiwi also rallied against the yen, climbing to an eight-month high around 86.35 yen NZDJPY=R , just shy of a five-year peak around 86.45 yen hit in April.

The kiwi is on track to end the year 1 percent higher versus the dollar and 3.6 percent higher against the yen, as the currency has been supported by speculation that New Zealand interest rates will rise early next year.

This would make New Zealand the first developed nation to tighten monetary conditions in the current cycle and help balance U.S. dollar strength following the Fed's decision to cut back on its asset purchases.

In contrast, the market expects the Reserve Bank of Australia to hold rates steady at a record low of 2.5 percent for the coming year. Interbank futures 0#YBA: imply a one-in-five chance of a further cut in rates.

The outlook for diverging interest rates has made the Aussie

AUDNZD=R another casualty of kiwi strength, putting it on track to lose roughly 13 percent this year. The Australian currency plumbed a five-year low around NZ$1.0730 earlier this month. On Wednesday, it traded around NZ$1.0850.

New Zealand government bonds 0#NZTSY= edged up, nudging yields as much as 1.5 basis points lower across the curve.

Australian government bond futures were a shade firmer with the three-year bond contract YTTc1 1 tick higher at 96.980. The 10-year contract added 1.5 ticks to 95.790.

(Editing by Kim Coghill)

((Cecile.Lefort@thomsonreuters.com)(+61 2 9373-1234)(Reuters Messaging: cecile.lefort.thomsonreuters@reuters.net))

Keywords: MARKETS AUSTRALIA/FOREX