Sterling drops to 1-mth low vs dlr as risk appetite ebbs

* Sterling shed nearly 1 pct vs dollar

* Speculators add to bearish bets against cable

* Eur/GBP higher, but euro's gains likely capped

By Anirban Nag

LONDON, Nov 21 (Reuters) - Sterling extended losses, falling to a fresh one-month low against a buoyant dollar on Monday and struggled against the euro on waning risk appetite, although anxiety about euro zone debt contagion is likely to cap the shared currency's gains.

Traders and analysts said the euro was unlikely to advance much against the pound in coming days given investors were still looking to seek the relative safety of UK assets.

Sterling was down 0.9 percent on the day at $1.5653, having fallen to $1.5635--its lowest since Oct. 18--with downside stops triggered below $1.5680. Traders said UK corporates were big sellers from around $1.5720 with funds, east European and Russian investors also looking to sell.

More downside stops are said to be below $1.5630 with technical support at around $1.5615, the 61.8 percent retracement of its rally from a low of $1.5266 on Oct. 6 to a high of $1.6167 on Oct. 31.

"Things are not looking positive for risk appetite..stocks are down and the dollar is higher. Cable is falling because of this and we expect it to test $1.55 in the near term," said Richard Driver, currency analyst at Caxton FX.

The dollar index rose to a six-week high as investors sought safety with the euro zone crisis and the failure of U.S. leaders to agree to deficit-cutting measure leading to a broad sell-off in riskier assets and currencies.

Additionally, sterling was vulnerable against the dollar given a fragile UK economy and the likelihood of further BoE asset purchases. Latest data showed speculators had added to their bearish positions on sterling in the latest week to Nov. 15

On Wednesday, minutes from the BOE's latest monetary policy committee (MPC) meeting will be released. At the meeting the MPC left its main interest rate unchanged at 0.5 percent and the target for asset purchases steady at 275 billion pounds.

Analysts said the minutes will reflect policymakers' readiness to extend quantitative easing further. Last week, BoE policymaker Martin Weale said there was a "very strong case" for extending the central bank's QE programme next year.

Another BOE policymaker, Adam Posen--a perennial dove--also argued that high inflation is not a threat and the economic outlook has turned out to be grim, as forecast..

Data on Monday showed UK shopper numbers between August and October fell at the fastest rate since last December's heavy snow, as cash-strapped Britons tightened their purse strings, a survey said on Monday.

"We expect sterling to remain an underperformer and anticipate any near term rebound in GBP/USD to remain limited," Morgan Stanley analysts said in a note. The firm has a near term target of $1.5630.

WEAKER VS EURO

Britain's Prime Minister acknowledged that slow growth is making it harder than expected for the country to cut its deficit, but even a temporary fiscal stimulus to boost the economy would be "dangerously wrong".

The UK still retains its AAA credit rating, mainly because it has been pruning expenditure and is trying hard to get its debt under control by following a tight fiscal policy.

Against the euro, sterling came under pressure, but losses were far more muted compared to its performance against the dollar.

The common currency was up 0.45 percent at 85.91 pence , not far from a session high of 85.945 struck earlier in the day. Traders cited offers above 86.00 pence while option expiries at 85.50 pence for the 1500 GMT cut is likely to sway trade.

The euro was under broad pressure with 10-year Spanish bond yield spreads widening over their German Bunds with a change in the government in Spain doing little to calm investors. In fact, investors are more anxious about the debt contagion now engulfing the region's bigger economies like France.

Those concerns are likely to keep the pound supported against the euro as investors seek to exit the euro zone for the relative safety of countries like the UK and the United States.

"Against the euro, we expect sterling to rise as inflows into UK gilts will support," said Driver. "We expect euro/sterling to drop below 84 pence in the near term."

(Editing by Toby Chopra, Ron Askew)