Sterling struggles to shake off GDP shock, minutes eyed

* Sterling hits 2-1/2 month low vs euro, down vs dollar

* BOE minutes eyed, market focus may come back to inflation

LONDON, Jan 26 (Reuters) - Sterling was struggling near a two-and-a-half month low against the euro and ceded ground on the U.S. dollar on Wednesday as investors cut long positions on reduced expectations for near term interest rates rises.

Dovish comments from Bank of England Governor Mervyn King who said while inflation is likely to rise towards 5 percent in the coming months, the surge is due to one-off events and any decision to raise interest rates will be based on longer-term goals also weighed on the pound. [ID:nSLAPCE7NL]

His comments came on a day when data showed Britain's economy shrank 0.5 percent in the last three months of 2010 prompting warnings of a grim 2011, driving investors to lessen the chances of an interest rate hike as early as May.

But traders said sterling could receive some support if the minutes from the Bank of England's Monetary Policy Committee (MPC) January meeting brought the focus back to sticky inflation. The minutes will be released at 0930 GMT.

"Given the strong December inflation print and increased expectation for a further pick-up in prices in the near term, risks likely favor increased hawkishness in the January minutes," Citi said in a note.

"While the minutes precede the weak GDP release, if the MPC again highlights greater inflation risk than downside risks to growth it could still spark a renewed bout of pound buying."

The euro EURGBP=D4 was up 0.2 percent on the pound, having jumped to a high of 86.725 pence, its strongest since Nov 8. Resistance is seen at around 86.90, the 61.8 percent retracement of the euro's fall from its Oct 25 high of 89.415 pence to recent low of 82.50 pence on Jan. 10.

Sterling was down 0.13 percent against the dollar GBP=D4 at $1.5800, not far from Tuesday's low of $1.5750, though technical analysts said there was support from its 100-day moving average at $1.5764. It also saw some steady buying by Asian central banks.

The pound had dropped sharply against all major currencies on Tuesday as investors reassessed the view that high inflation would force an early Bank of England rate hike.

Implied interest rate futures based on overnight index swaps showed investors are pricing in a 30 percent chance of a 25 basis point May rate hike, down from over 60 percent on Monday. BOEWATCH.

Analysts said the poor GDP data will raise concerns about whether the UK economy is robust enough to withstand the government's harsh austerity measures aimed at tackling the fiscal deficit, while sticky inflation will heighten the BOE's dilemma on whether to raise interest rates or not.

(Editing by Toby Chopra)