Sterling dented by weak UK data, risk of more QE

* QE risk weighs on sterling, hits 6-1/2 mth low vs euro

* Weak UK retail sales exacerbate concerns about UK economy

* Pound hits lowest in nearly 5 mths on trade-weighted basis

By Jessica Mortimer

LONDON, Oct 21 (Reuters) - Sterling hit a 6-1/2 month low against the euro on Thursday after weak UK retail sales data increased concerns that Bank of England policymakers may opt to inject more stimulus into a faltering economy.

British retail sales unexpectedly fell for the second month in a row in September, lending weight to the view that the UK economic recovery has peaked. [ID:nLDE69K0UP]

The data dented the pound, which has come under selling pressure since BoE minutes on Wednesday showed one policymaker, Adam Posen, calling for a resumption of stimulus through quantitative easing. [ID:nLDE69J0S9]

"Worries about more QE have been weighing on sterling, there has been a lot of selling on that," said Richard Wiltshire, chief FX Broker at ETX Capital.

"UK policymakers have all admitted there are a lot of risks to the economic recovery and that will keep sterling under pressure. I don't see any reason to buy sterling at the moment".

At 1502 GMT, the euro EURGBP=D4 was up 0.8 percent at 88.81 pence, having earlier touched a high of 89.07 pence, its strongest since March 31, though it struggled to sustain a move above 89.

Falls versus the euro helped push sterling's trade-weighted index =GBP down to 78.6, its weakest in nearly five months, while the pound fell 0.4 percent against the dollar GBP=D4 to $1.5775.

CMC Markets analyst Michael Hewson said 88.95 pence was a key technical level, marking the 61.8 percent retracement of the down move from just above 94 pence in October 2009 to just below 81 pence in June this year.

"If the euro closes above 88.95 then it should head towards the March highs (above 91 pence)".

QE RISK

Analysts and traders were concerned about growing evidence the UK economy was weakening even before the government embarks on an unprecedented drive to slash public spending in a bid to cut the country's debt burden.

UK finance minister George Osborne on Wednesday set out the government's cost-cutting plans. Speaking on Thursday, he said the BoE is free to deploy monetary tools to help shore up the economy. [ID:nLAL004536] [ID:nLDE69J0G8]

"The retail sales numbers were fairly dire and will make the case for the monetary doves on the MPC," CMC's Hewson said.

The BoE minutes revealed a three-way split, with Andrew Sentance calling for a rate hike to tackle high inflation. Sentance is seen as a lone voice, however, and comments from policymakers on Thursday suggested others may be edging towards the dovish camp.

Monetary Policy Committee member David Miles was quoted as saying UK monetary policy is extraordinarily expansionary and can still be used further if needed. [ID:nLAJ002426]

BoE's chief economist Spencer Dale was quoted as saying uncertainty over inflation and the speed of the economic recovery meant policymakers must alter their views as circumstances change. [ID:nLDE69K0A7]

Data from the BoE on Thursday showed lending to UK firms rose in August for the first time since February, but mortgage approvals fell to their lowest since April 2009. [ID:nBOE004356]

(Editing by Toby Chopra)