(Updates prices, adds fresh comment)
By Ritvik Carvalho and Patrick Graham
LONDON, March 23 (Reuters) - Sterling hit a one-month high against the dollar on Thursday, outperforming other major currencies after stronger than expected UK retail sales data soothed worries about weakening consumer sentiment.
Sales rose by 1.4 percent in February from January, the official numbers showed, beating a 0.4 percent increase forecast from a Reuters poll of economists and ending a streak of three consecutive monthly declines.
For the three months to February, this was still the biggest slide for retail sales in nearly seven years as higher fuel prices eroded shoppers' disposable income and the Office for National Statistics said the monthly improvement was too little to offset the drag from previously weak demand.
But added to comments by Bank of England deputy governor Ben Broadbent, the numbers bolstered speculation that the bank might be able to raise sterling interest rates at least once in the next year, driving the pound half a cent higher.
It peaked at $1.2532, its highest since Feb. 24, before retreating slightly to stay largely unchanged at $1.2526, up 0.3 percent on the day.
It was also 0.5 percent stronger at 86.08 pence per euro.
"They (retail sales) were obviously stronger than expected which just added to the recently rather positive sentiment towards the pound," said Commerzbank currency strategist Thu Lan Nguyen, noting a near two-week rise in the British currency.
"But obviously there are some people questioning the sustainability of this trend in consumption."
Sterling has lost nearly a fifth of its value since the EU referendum in June, contributing to a spike in domestic inflation which has further weighed on previously robust consumer spending which then propped up the UK economy.
A stream of recent data had suggested British consumer sentiment waning, as rising prices force Britons to spend less on non-essential items.
That speaks for continued easy monetary policy. But signs that the bank will step in to support the pound with both hawkish talk and potentially a rise in official borrowing costs have instead dominated the past week's trade in sterling.
Broadbent said on Thursday it was possible that interest rates could rise, although he also highlighted the strong sense of caution among investors about the outlook for Britain after Brexit.
A number of major banks have warned in the past month that sterling could fall below $1.20 as public jousting with Brussels on the terms of Britain's departure from the EU gets going after the launch of talks next month.
"It's worth noting that when we look at the reaction to retail sales, it's typically inconsistent and short-lived, mainly because of the actual volatile nature of the underlying data series," said ING currency strategist Viraj Patel.
"The headline (number) is great, but the actual underlying story is still weakening ... that's what matters for a policymaker." (Reporting by Ritvik Carvalho and Patrick Graham; Editing by Catherine Evans and David Evans)