* Dollar falls to more than 8 month low versus FX basket

* Euro rises to 8-1/2 month high, nearing 2013 peak

* Fed tapering seen unlikely this year, weighs on dollar

* Tuesday's US payroll data next focus

By Jessica Mortimer

LONDON, Oct 18 (Reuters) - The dollar fell to eight-and-a-half-month lows against the euro and a currency basket on Friday on speculation the fallout of this month's political impasse in the U.S. would prevent the Federal Reserve from scaling back monetary stimulus.

A little over a month ago, analysts were convinced the Fed was ready to embark on the first step of reining in five years of ultra-loose monetary policy for the world's biggest economy.

But the Fed's surprise decision to hold off from doing so in September has now been followed by a 16-day halt in government spending and a deal over the debt ceiling which means it may all happen again early next year.

If that all keeps Fed policy on hold for months to come, that in turn should keep a lid U.S. Treasury yields, which would dim the appeal of the dollars.

The dollar index fell to 79.596, its lowest since early February. It was down around 0.9 percent on the week and on track for its biggest weekly decline since mid-September, when the Fed shocked markets by keeping its bond-buying intact.

The euro rose to $1.3692 against the dollar, its highest since early February and near the 2013 peak of $1.3711.

"With the impasse in the U.S. having passed people will go back to the Fed taper discussion," said Paul Robson, currency strategist at RBS.

"The market will come round to the idea that tapering is off the agenda until the back end of Q1 or even Q2, and that is a powerful dollar negative," he said, adding there was a risk of the euro rising towards $1.40.

The deal reached on Wednesday only funds the U.S. government until Jan. 15 and raises the borrowing limit through to Feb. 7.

The first wave of U.S. data released on Thursday after the government returned to work was fairly upbeat. But the main focus is on the September payrolls report, which the Labor department said will be published on Tuesday.

The euro was 0.1 percent against the low-yielding yen at 133.97. Further gains would leave it in view of a four-year high of 134.95 yen set a month ago.

A trader for a Japanese bank in Singapore said one point to watch was whether European authorities will express concerns about the euro's latest rise given the potential impact on euro zone exports.

The dollar also struggled against the yen after a fall in U.S. bond yields undermined the U.S. currency's allure. It was down 0.15 percent on the day at 97.93 yen, below a three-week high of 99.01 yen reached on Thursday.

The Australian dollar rose 0.2 percent to $0.9638 and was near Thursday's four-month high of $0.9647, helped by data showing China's annual economic growth quickened to 7.8 percent in the third quarter.