Sterling falls to 2-month low vs euro on risk of more QE

* Sterling slides as BoE minutes increase risk of more QE

* Minutes show 2 votes for a bigger rise in QE in February

* Euro jumps through key levels to 2-mth high of 84.57 pence

* Pound falls 0.8 pct vs dollar, hits 2-mth trade-weighted low

By Jessica Mortimer

LONDON, Feb 22 (Reuters) - Sterling fell to a two-month low against the euro on Wednesday after Bank of England minutes unexpectedly showed two policymakers voted for an even bigger increase in quantitative easing than the bank implemented this month.

The BoE's David Miles and Adam Posen voted to pump an extra 75 billion pounds into the economy instead of 50 billion, increasing the possibility that the central bank will opt for more easing later in the year.

Traders said many in the market had positioned for the risk of one or two policymakers voting for no QE at all after this month's BoE inflation report predicted the economy would improve, dampening expectations of further stimulus.

The surprisingly dovish minutes propelled the euro to a high of 84.57 pence, a rise of 0.75 percent on the day, topping the 2012 high of 84.09 pence, the late December high of 84.22 and potentially paving the way for a move towards 85 pence.

The euro broke firmly out of the relatively narrow range from 82.22 pence to 84.09 pence that it traded within throughout 2012 and analysts said this could give it more scope for further gains.

However, the euro's gains could be limited due to concerns the euro zone still has many hurdles to clear after finally agreeing a second Greek bailout package as concerns remain about whether Greece can implement the tough measures demanded of it.

"Markets were wrong-footed after expectations of QE had been scaled back," said Simon Smith, economist at FXPro.

"I expect sterling will hold onto this weakness against the euro for the next week or so, but there are still quite a few hurdles on Greece for the next few weeks and there could be bigger risks ahead for the euro".

The euro's next target was the 100-day moving average around 84.78 pence. It was last at 84.44 pence.

Sterling's broad falls dragged the pound's trade-weighted index to a two-month low of 80.4.

CENTRAL BANK CAUTION

Sterling also fell sharply against the dollar, losing around 0.8 percent on the day to hit $1.5648, its lowest in a week and well below an earlier high of $1.5816.

This took it just shy of the mid-February low of $1.5644, which would mark its lowest in around four weeks.

"The minutes have made more QE more likely than the market had anticipated, and it came as a surprise, which is why there's been a fairly big move in sterling," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

"They showed appetite for more QE is probably stronger than suggested by the inflation report, which is more of a consensus view".

Recent UK data suggested the economy has picked up at the beginning of this year, while February's BoE inflation report predicted growth would improve later in the year and inflation would drop close to 2 percent in two years.

BoE Deputy Governor Charles Bean echoed this view on Tuesday, saying Britain's economy looked set for a modest recovery.

However, policymakers are likely to remain cautious given that the economy would be very vulnerable to any worsening of the euro zone debt crisis or to a further rise in oil prices.

"There is a sense that central banks do not want to get too bullish on hopes for a recovery. There have been a lot of false dawns," FXPro's Smith said. (Additional reporting by UK economics team; editing by Stephen Nisbet)