LONDON (AFP) ? Sterling slumped against the euro and dollar on Tuesday as official data showed the British economy shrank surprisingly at the end of last year, analysts said.
In London trade, the pound slid to $1.5783 from $1.5988 in New York late on Monday. The euro rose to �0.8604 from �0.8527 on Monday.
"The pound tumbled across the board after preliminary fourth quarter GDP came in significantly below expectations," said Michael Hewson, an analyst at trading group CMC Markets.
"Part of this can be put down to the bad weather in December; however the extent of the fall has spooked markets and seen the pound plummet and gilt (bond) prices soar as the likelihood of a rate hike disappears in the near term."
Britain's economy shrank by a shock 0.5 percent in the fourth quarter of 2010, dashing expectations for growth, as freezing weather sparked the first contraction since 2009.
Gross domestic product (GDP) fell 0.5 percent in the three months to December, after expansion of 0.7 percent in the third quarter, the Office for National Statistics (ONS) said in a statement giving its initial estimate.
That was the first drop since the third quarter of 2009 and confounded expectations for modest growth of 0.4 percent in the fourth quarter, according to analysts polled by Dow Jones Newswires.
"These awful figures present the Bank of England with a major headache but also justify (BoE governor) Mervyn King's reluctance to countenance a rise in rates."
British interest rates have stood at a record low 0.50 percent since March 2009, while prior to Tuesday's data many economists were forecasting a rise soon to help counter strong inflation in Britain.
Meanwhile, there is growing expectations that the European Central Bank is eyeing an interest rate rise to respond to inflation pressures in Europe.
The euro touched a two-month high of $1.3686 late Monday after ECB chief Jean-Claude Trichet warned against inflation pressures in the eurozone, in an interview with the Wall Street Journal.
"Trichet's remarks raised speculation that the ECB may raise interest rates," said Akihiro Tanaka, dealer at Resona Bank.
Optimism is also growing that the European Union is getting to grips with its financial and sovereign debt crisis, with political turmoil in Ireland failing to dampen sentiment.
Dealers noted Spain's announcement on new plans to reform and stabilise its regional savings banks, seen as a weak link in the financial system.
In London on Tuesday, the euro changed hands at $1.3581 against $1.3635 in New York late Monday, at 111.83 yen (112.50), �0.8604 (0.8527) and 1.2876 Swiss francs (1.2939).
The dollar stood at 82.35 yen (82.48) and 0.9480 Swiss francs (0.9478).
The pound was at $1.5783 (1.5988).
On the London Bullion Market, the price of gold fell to $1,327.70 an ounce from $1,343 late on Monday.
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