Sterling hits 7-wk low vs euro, hurt by weak data

* Sterling touches 7-week low vs euro of 84.03 pence

* UK retail sales unexpectedly fall 0.5 pct in August

* Spanish auction lifts euro; stops seen above 84.05

(Updates prices)

LONDON, Sept 16 (Reuters) - Sterling fell to a seven-week low against the rebounding euro on Thursday, after data showed UK retail sales fell unexpectedly in August and strong demand at an auction of Spanish debt lifted the single currency.

UK retail sales dropped 0.5 percent in August, surprising analysts who had forecast a modest increase and backtracking after several months of solid growth. [ID:nLDE68F0RH]

The data was seen as a sign that UK consumers may be reining in spending ahead of substantial spending cuts planned by the government later in the year.

"August's fall in retail sales could be the first sign that the surprising resilience of consumer spending could be coming to an end," said Vicky Redwood at Capital Economics.

The single currency rose as high as 84.02 pence, its strongest since late July, though it struggled to sustain a break above 84.00 pence, where technical analysts see stiff resistance.

"If sterling closes above 84 pence then it could be in for a difficult couple of weeks," said RBS currency strategist Paul Robson.

At 1515 GMT, the euro was up 0.7 percent at 83.81 pence, in line with broad gains following the Spanish debt sale result which eased some of the concerns about whether peripheral euro zone countries can fund hefty debt burdens. [ID:nLDE68F0QX]

Traders said stop loss orders would be triggered above 84.05 pence.

Against the dollar, sterling was flat GBP=D4 at $1.5622, though it was off a low of $1.5536 hit just after the data. Traders said sterling buying by U.S. and European names helped limit losses.

Technically, sterling was well supported against the dollar, staying above a number of closely watched moving average levels, including its 200-day moving average currently at $1.5379 and the 50-day moving average at $1.5508.

INDUSTRIAL ORDERS FALL

A survey by the Confederation of British Industry (CBI) showed British factory orders fell a little more than expected, with the total order book balance dropping to -17 this month from -14 in August, against forecasts for a modest improvement to -13. [ID:nAHLGKE66U]

The survey also revealed a pick-up in inflationary pressures, while a Bank of England survey showed inflation expectations rose to their highest in two years. [ID:nBOE004332]

However, analysts said the market was focused more on the outlook for growth than inflation.

"Inflation may reduce the chances of the BoE doing more QE (quantitative easing), but growth is clearly the focus ... The retail sales data is fuelling the idea that things will get tougher in the UK later in the year when fiscal austerity kicks in," RBS' Robson said.

A fall in export orders in the CBI survey also spelt bad news for an economy counting on external demand for its growth.

"The export orders index eased back, dashing hopes that we would start to see some firmer signs that net exports would be starting to support the recovery and aiding the rebalancing of the UK economy," Tom Vosa, head of market economics, Europe, at National Australia Bank wrote in a note. (Reporting by Jessica Mortimer and Anirban Nag; Editing by Susan Fenton)