Banking worries drag pound down

LONDON (Reuters) - The fell over half a percent versus the euro and the dollar on Monday, with trouble at Britain's largest buy-to-let mortgage lender Bradford & Bingley rekindling concerns over the health of the financial sector.

In an unscheduled trading update, the embattled lender reported a near 50 percent year-on-year slump in profits for the first four months of 2008, scaled back a planned rights issue and announced a cash injection from a U.S. private equity firm.

Bradford & Bingley's chief executive quit on Sunday and trading in its shares BB.L was temporarily suspended after the stock was indicated as much as 26 percent lower before the open.

Its news was seen as a sign the financial sector -- a key driver of the UK economy -- is far from being out of the woods following the credit crunch that started 10 months ago.

"That (the financial sector) is the root cause of the problem so any news like that will continue to push sterling down," said Geoff Kendrick, currency strategist at Westpac.

"The Bank of England is stuck between the fact that inflation remains very high and the domestic economy continues to soften...So medium term that's definitely sterling negative."

By 8:16 a.m., sterling was down 0.7 percent at $1.9670 GBP=, a one-week low. The euro rose half a percent to 78.83 pence EURGBP=.

Monday's UK calendar features manufacturing PMI for May and mortgage approvals and lending figures for April at 9:30 a.m.

"Today's manufacturing PMI will skirt 50, underlining the fragile state of affairs, while lending data will serve as a reminder of the weakness in the housing market and associated risks for spending," Calyon said in a research note.