Sterling surges vs euro but capped on BoE rate views

* Sterling hits 2-wk high vs euro, moves away from record low

* Euro/stg set for biggest 1-day loss in 9 yrs EURGBP=

* Pound flat vs dollar on broad dollar gain GBP=

* Expectations for large BoE rate cut keep gains capped (Adds quotes, updates prices)

LONDON, Jan 5 (Reuters) - Sterling rallied from recent record lows versus a broadly weaker euro on Monday but was pressured against the dollar on expectations the Bank of England will cut interest rates aggressively again later this week.

The euro was on track for its biggest one-day loss against the pound in nine years with a recent drive toward parity failing for now as the single currency dived some two percent against the dollar. A fall in Britain's construction sector and a retailer's report on Monday after dismal housing and bank lending data on Friday reinforced views the UK economy is headed for a steep downturn and interest rates will continue to be slashed.

Market players are expecting the UK central bank to ease borrowing costs by at least 50 basis points to a historic low of 1.5 percent from the current 2.0 percent BOEWATCH.

"We are still looking for a 50 basis point reduction to 1.5 percent this month. It is possible that the MPC opts for a more aggressive 75 basis point or even 100 basis point move," said Philip Shaw, chief economist at Investec.

The BoE will announce its decision on Thursday after a two-day rate meeting.