Sterling rallies broadly on UK CPI, Cadbury deal

* Sterling hits 4-month high vs euro, 6-week high vs dlr * Higher-than-expected UK CPI adds to argument to end QE * Pound supported by Kraft/Cadbury takeover agreement

LONDON Jan 19 (Reuters) - Sterling hit a four-month high against the euro and its strongest in six weeks versus the dollar on Tuesday after a jump in UK consumer prices suggested the Bank of England may soon end quantitative easing.

British confectioner Cadbury's CBRY.L agreement to a takeover bid by U.S. food manufacturer Kraft Foods (KFT.N) also bolstered the pound on the view that the deal underlined the appeal of UK assets to overseas investors.

Government figures showed consumer prices rose 0.6 percent in December, taking the annual rate to 2.9 percent from 1.9 percent in November, the biggest monthly rise in the annual index since records began. [ID:nONS004728]

A rise to 2.6 percent had been forecast. The reading also exceeded the BoE's 2 percent inflation target.

Analysts said the data, along with other buoyant indicators in the past week, supported the case for the central bank to cease buying domestic assets from the market to stimulate the economy.

"The CPI numbers are certainly helping sterling," said Kenneth Broux, market economist at Lloyd's Banking in London.

"All the inflation measures were up. It's going to be very hard for the BoE to continue quantitative easing."

By 1015 GMT, sterling rallied to 87.30 pence per euro EURGBP=D4, its highest since mid-September.

The euro fell more than 0.8 percent on the day, falling decisively below its 200-day moving average around 88.40 pence, in what analysts said was a sign the single currency may remain weak versus the pound.

A weak survey of German economic sentiment stung the euro, which has been under broad selling pressure in the past week due to escalating concerns about the bloated debts of euro zone member Greece.

Sterling GBP=D4 climbed as high as $1.6459 following the UK CPI data to a level not seen since early December, before pulling back to around $1.6408.

Traders said the pound was drawing support from an announcement that Kraft had agreed a recommended takeover deal for Cadbury for around 11.9 billion pounds, which would create the world's top confectioner. [ID:nL9294700]

END TO QE?

Buoyant economic data on the UK housing market, industrial production and retail sales have boosted sterling in the past week or so, luring investors who have become jittery about debt levels in some euro zone countries and question the strength of the U.S. economic recovery.

While many investors still believe the Bank of England will be among the last of the major central banks to raise interest rates as the economy slowly improves, analysts say the argument for an end to quantitative easing is strengthening.

Markets awaited a speech by BoE Governor Mervyn King later on Tuesday to see if he will offer any clues to whether the central bank may or may not to extend its 200 billion pound asset-purchasing plan, which runs out in February.

Minutes from the BoE's January policy meeting due on Wednesday will also be scrutinised to see if policymakers discussed an eventual end to quantitative easing.

Comments last week from BoE policymaker Andrew Sentance, who said the central bank may be close to halting its asset-buying programme, have also boosted sterling.

(Reporting by Naomi Tajitsu, editing by Nigel Stephenson)