Darling comments boosts Gilts

LONDON (Reuters) - Gilts and short sterling futures rose sharply on Monday, pushing down yields and implied interest rates as housing data and comments from the UK finance minister darkened further the gloomy outlook for the economy.

Chancellor of the Exchequer Alistair Darling said in an interview with the Guardian newspaper on Saturday that the economy is in worse state than expected and is facing its toughest time in 60 years.

And a report on Monday from property consultants Hometrack showed that UK house prices fell in August for the 11th straight month.

Sterling Overnight Index Average rates (SONIA) contracts, a market gauge of anticipated central bank rates, shifted to now fully price in a Bank of England quarter point rate cut by November and 50 basis points of easing by February.

The Bank's Monetary Policy Committee meets to set interest rates on Thursday and is expected to keep them on hold at 5 percent, even though the economy ground to a halt in the second quarter and many analysts say may now be in recession.

But how much longer they can hold out is open to question.

"They've had a cracking start to the session and I see more upside," said David Keeble, head of rates strategy at Calyon in London, referring to gilts' and short sterling opening gains.

"Sterling is a small market on a global stage and it is looking as though the BoE are next in line to cut rates. This should create a lot of overshoot potential," he said.

At 8:45 a.m. short sterling rates futures were up as much as 15 ticks across the 2008-09 strip <0#FSS:>, and September gilt futures were up a quarter of a point at 109.80.