Sterling rallies on strong UK Q3 GDP data, S&P

* Hits day's high vs dlr, euro on UK GDP surprise, S&P

* UK GDP 0.8 pct vs +0.4 pct forecast, S&P ups UK outlook

* GDP data cools speculation over more BoE monetary easing

By Naomi Tajitsu

LONDON, Oct 26 (Reuters) - Sterling hit the day's high against the dollar and the euro on Tuesday after surprisingly strong economic growth data and a vote of confidence in the government's management of the economy from ratings agency S&P.

The UK economy grew 0.8 percent in July-September, twice as fast as forecasts, data showed, dampened speculation the Bank of England may soon implement more quantitative easing. [ID:nLDE69P0VZ]

The pound extended its rally after Standard and Poor's later revised its outlook on the UK economy to "stable" from "negative", easing concerns about the possibility of falling demand for UK assets.

The news pushed the pound nearly 1 percent higher on the day versus the dollar, and it also recovered from a near seven-month trough against the euro.

The GDP figure followed a 1.2 percent expansion in April-June, suggesting the economy is relatively robust as the government prepares to implement wide-ranging austerity measures announced last week.

Analysts also said the strong reading cooled expectations the UK central bank may buy more UK assets from the market in an attempt to flood the system with cash to stimulate the economy, a move that is seen as being negative for the pound.

The BoE's Monetary Policy Committee holds its next regular policy meeting next week. "The strong GDP seriously weakens the case for more QE. Plans for fiscal consolidation have come out, but on the whole the economy is doing OK," said Raghav Subbarao, currency strategist at Barclays Capital.

"I don't think the MPC will announce another round of asset buying and this number supports that argument. On the whole the data is positive for sterling, but the market will be watching to see its impact on the BoE."

Also boosting the pound was S&P's decision to raise its outlook. The agency said the government's spending review last week reduced the risks to the implementation of its fiscal consolidation programme announced in June. [ID:nWLA6239]

Sterling GBP=D4 rose roughly 1 percent on the day to a session high of $1.5895, pulling back from a slide to $1.5657 on Monday. By 0953 GMT, it traded at $1.5847.

The euro EURGBP=D4 fell around 1.1 percent to the day's low of 87.76 pence, retreating from 89.41 pence hit on Monday, its strongest since late March.

DATA IMPACT ON MPC

Sterling has risen against the dollar since September on the back of broad selling of the U.S. currency on speculation of more quantitative easing by the Federal Reserve.

At the same time, the pound has suffered versus other currencies, pushing its trade-weighed index to a five-month low on Monday, on speculation the BoE may also inject more cash into the market to help boost the economy.

Analysts said such speculation had been premature even as MPC board member Adam Posen this month voted for more easing, while Andrew Sentance argued for a rise in interest rates. The BoE ultimately decided to keep policy unchanged.

"A lot of people got a little too bearish too soon on the UK economy," said Michael Hewson, market analyst at CMC Markets. "This weakens the hand of doves like Adam Posen who are arguing for QE."

Still, other analysts argued that while the GDP data may help to push back further talk of QE, growth will keep slowing as negative headwinds pick up from ongoing credit restrictions, public sector job losses, benefit cuts and higher taxes.

Some still see the case for further easing, an that the BoE may announce an extension of its 200 billion pound asset-buying plan as early as next month.

(Additional reporting by Nia Williams; Editing by John Stonestreet)