Sterling knocked over Bear Stearns worries

LONDON (Reuters) - The pound hit a record trough versus the euro and its lowest since 1997 on a trade-weighted basis on Monday as troubles at U.S. banking heavyweight Bear Stearns stoked fears about Britain's financial sector.

The U.S. investment bank is being bought by JP Morgan Chase for just $2 a share, triggering fears that troubles in the UK banking sector could also deepen and hurt the wider economy.

Banking shares were down across the board with HBOS HBOS.L and Barclays (BARC.L) shares down by more than 7 percent.

"It's a risk aversion story following the Bear Stearns business last week and over the weekend," said Adrian Schmidt, currency strategist at RBS Global Banking.

"Because Britain has been though the Northern Rock story, it is more identified with the U.S. problems. The UK is seen as structurally similar to the U.S. as it has the same issues of personal debt and falling house prices."

The government nationalised Northern Rock in February after spending five months trying to find a private sector buyer for the lender that had fallen foul of the global credit crunch.

The pound also took a knock when the Bank of England said it would offer five billion pounds of three-day funds. The auction was nearly five times oversubscribed.

The euro hit a record high of 79.12 pence before retreating to 78.53 pence by 1528 GMT, still up 1.19 percent on the day EURGBP=.

On a trade-weighted basis the pound fell as low as 93.4, its lowest since January 1997 =GBP.