Sterling falls as manufacturing PMI below expectations

LONDON (Reuters) - Sterling hit a three-week low against the euro and cut gains against the dollar on Wednesday after a purchasing managers' survey came in sharply lower than expectations.

The Markit/Chartered Institute of Purchasing and Supply Manufacturing PMI fell to 54.3 in August -- below all forecasts in a Reuters poll -- from a downwardly revised 56.9 in July. That was the lowest level since November last year although it was still above the 50 mark which separates growth from contraction in activity.

The euro rose to 83.16 pence, its highest since August 11, according to Reuters charts, from around 82.60 pence before the data. It was last up 0.5 percent at 83.01 pence.

Trade-weighed sterling fell to 81.6, not far from a one-month low.

"The market expected some weakness in the data so I'm slightly surprised at the strong reaction," said RBC Capital Markets strategist Christian Lawrence, adding very short-term positioning may have exacerbated the move.

"We should see some correction, some pullback," he added, given general sentiment in the market had improved as robust data from Australia and China eased concerns about a weakening global economic recovery.

The pound fell some 60 pips against the dollar to $1.5345 on the PMI data. By 0923 GMT, it was at $1.5371, up 0.1 percent on the day.

Support was seen near $1.5322, the 38.2 percent Fibonacci retracement of the pair's May-August rally. It had hit a five-week low of $1.5327 on Tuesday.

"It's a risk favourable environment, and a bit of a surprise that the Asia-Pacific sector is doing well and shows China and Australia have domestic drivers for the economy," said Geoffrey Yu, currency strategist at UBS.

The pound recovered from 20-month lows hit against the Swiss franc of around 1.5544 francs on Tuesday.

It was hurt the previous day as net lending to British households unexpectedly fell to a four-month low last month after a sharp decline in mortgage lending, despite a small rise in mortgage approvals.

(Reporting by Tamawa Desai; editing by Ron Askew)