Sterling hits 3-wk high vs dollar on risk demand, UK data

* Sterling hits 3-wk high of $1.6587, risk appetite up * Pound rallies on surprisingly strong UK retail sales

* Investors await UK GDP data, by-election results

LONDON, July 23 (Reuters) - Sterling hit a three-week high against the dollar on Thursday, lifted by gains in global equity markets and stronger-than-expected UK retail data that raised hopes the British economy was over the worst of the recession.

Sterling's upside momentum began early on Thursday, when British retail data showed sales volumes rose 1.2 percent in June on the month, over three times analysts' forecasts [ID:nLN86107].

Better-than-expected results from Credit Suisse (CSGN.VX) and other firms reassured investors that the world economy was on the mend, boosting share indexes in Europe and pushing up currencies perceived to be higher risk.

Higher risk-demand pressured the dollar broadly lower. Wall Street shares .DJI and oil prices CLc1 each gained more than 2 percent.

"At the moment, whichever way stocks have moved has impacted the dollar, and this has had a knock-on effect on sterling," CMC Markets analyst James Hughes said.

Stronger retail sales data also boosted hopes that the first estimate for Britain's second-quarter gross domestic product, due on Friday, would show the economy contracting at a much slower rate, analysts said.

By 1644 GMT, sterling traded 0.6 percent higher at $1.6559 after rising as high as $1.6587 GBP=D4, its strongest level since late June.

It was particularly strong against a broadly weaker yen, which typically suffers in times of rising risk appetite. The pound rose roughly 2 percent to 157.24 yen, its highest in nearly three weeks.

The euro lost 0.1 percent against the pound to 86.15 pence EURGBP=R.

BOE MINUTES SUPPORT

Sterling also received a boost after the British Bankers' Association reported a jump in British mortgage approvals, suggesting that lending was recovering from the credit crisis. [ID:nLAJ002220].

"We have continued to see slightly better data out of the UK, which is supporting sterling," Audrey Childe-Freeman, senior currency strategist at Brown Brothers Harriman, said.

A positive reading for second-quarter GDP could push sterling higher against the dollar on Friday, she added.

A Reuters poll of economists predicts British GDP fell 0.3 percent on the quarter, slowing from a 2.4 percent slump in the first quarter that was the biggest decline since 1958.

Investors will also be keeping an eye on the results of a local British election on Thursday. [ID:nLN82909].

A major Labour defeat could spell more trouble for Prime Minister Gordon Brown, adding to political instability that could weigh on the pound. (Reporting by Jessica Mortimer and Nicholas Vinocur; Editing by Lin Noueihed) ((nicholas.vinocur@thomsonreuters.com; +44 0207 542 8147; ReutersMessaging: nicholas.vinocur.reuters.com@reuters.net))