UPDATE 1-Jittery rouble falls vs dollar as sanctions fears erode domestic FX confidence

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This content was produced in Russia where the law restricts coverage of Russian military operations in Ukraine

(Updates prices, adds trader comment)

By Alexander Marrow

MOSCOW, Oct 3 (Reuters) - The Russian rouble pared early gains to weaken versus the dollar in volatile trade on Monday but leapt against the euro amid limited liquidity and as investors feared new sanctions may limit their ability to trade foreign currencies in Moscow.

Russian markets expect more sanctions after President Vladimir Putin signed treaties annexing four Ukrainian regions last week, a move Western governments and Kyiv say breaches international law.

By 1444 GMT, the rouble was 1% weaker against the dollar at 59.05, hitting 59.65, its weakest point since Sept. 23. It had traded below 57 earlier in the session.

On Friday, the rouble had soared to its strongest since July 1 against the greenback and a near eight-year high against the euro.

"To say that the rouble was volatile on Friday would be an understatement," said Dmitry Polevoy, head of investment at Locko Invest. "56.90 at breakfast, 53.20 at lunch and near 58.45 at dinner."

With the conclusion of last week's month-end tax period that usually sees export-focused firms convert FX revenues into roubles to pay local liabilities, Polevoy said there should be no strengthening of the level seen on Friday.

The rouble had gained 2.8% to trade at 55.09 versus the euro , after reaching 50.7250 on Friday. It had firmed 0.6% against the yuan to 8.291.

One trader at a large Russian bank said there was total lack of liquidity when it came to the euro.

"To put out a more or less significant real volume of foreign currency in the current environment and not break the market, you need to fill the order book in very small portions and often," the trader said. "If you can't do that, you see skewed quotations."

Russian stock indexes were higher, but remain highly susceptible to geopolitics.

"For the Russian market geopolitical risk remains on the agenda after Gazprom suspended its gas supplies to Italy over the weekend, in what appears to be the latest iteration of the conflict between Moscow and the EU over the supply of natural gas," said Alfa Bank in a note.

The dollar-denominated RTS index was up 4.2% to 1,982.1 points. The rouble-based MOEX Russian index was 2.9% higher at 1,077.4 points.

Russian manufacturing activity grew at its fastest rate in 3-1/2 years in September, driven by rises in production, new orders and client demand, a business survey showed on Monday, though Western sanctions continued to weigh on export business. (Reporting by Alexander Marrow, editing by Ed Osmond)