Pound pares gains on GDP as economy woe weighs

LONDON (Reuters) - Sterling fell against the dollar and euro on Friday after better-than-expected fourth quarter GDP data failed to offset persistent worries over the health of the economy.

The pound initially rose after the Office for National Statistics said economic output grew more than forecast in the final three months of 2009 but turned down as traders focussed on a downward revision to the estimate for year-on-year growth.

The ONS revised its estimate of fourth-quarter GDP to 0.3 percent from an initial 0.1 percent. However, it revised its estimate of the year-on-year contraction to 3.3 percent from 3.2 percent.

"The headline figure was quite positive, but if you dig a little deeper, the third quarter was revised lower and the year-on-year figure was revised lower still," said CMC Markets analyst Michael Hewson.

At 10:35 a.m., sterling had pulled back from a session high of $1.5327 versus the dollar to trade down 0.1 percent at $1.52646. Versus the euro, the pound slipped to a six-week low of 89.25 pence, down 0.5 percent on the day.

"Sterling will remain weak as nothing fundamentally has changed. These figures merely confirm that the economy is fairly weak at the moment and the pound will be susceptible to structural weaknesses in the UK economy," Hewson added.

UK WOES

Sterling hit a nine-month low against the dollar on Thursday on weak data and concerns the Bank of England could expand its quantitative easing asset-purchase programme.

This in turn helped push the pound to its lowest in 11 months against the yen and its weakest against the euro in more than five weeks, while sterling's trade-weighted index fell to a four-month low.

"There are multiple factors weighing against sterling, in particular the fiscal situation and the prospect of a hung parliament in the UK. We expect the pound to remain under selling pressure," said Bank of New York Mellon currency strategist Neil Mellor.

Latest opinion polls show there is a strong possibility of a hung parliament when Britain goes to the polls by June of this year, fuelling worries that attempts to tackle the country's spiralling fiscal deficit will be stymied.

Fiscal concerns were such that a possible downgrade of the UK's AAA credit rating could be on the cards, ING strategists said in a note.

"Despite protestations to the contrary, the UK is struggling to avoid comparisons to Greece and fears of a debt downgrade are stalking sterling," they said.

Any downgrade was not anticipated ahead of the election.

An unexpectedly steep fall in UK business investment in the last three months of the year added to fears over the state of the economy.

The latest Nationwide housing survey showed prices fell 1.0 percent in February.

Sterling has been pressured this week since Bank Governor Mervyn King said further asset purchases under quantitative easing may be needed.

The Monetary Policy Committee meets next week, but no change to interest rates or quantitative easing is expected.

"Existing quantitative easing still needs time to bleed through the system. To print more money now would be a little premature." said CMC's Hewson.

(Editing by Nigel Stephenson)